Friday, October 26, 2018

Donating Required Traditional IRA Distributions

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

As many of you know, you are required to take taxable distributions from your Traditional IRA once you attain the age of 70½.  Those of you that have experienced this firsthand likely experienced a subsequent uptick in state and federal tax due.  However, as touched on in 2016, donating these required Traditional IRA distributions directly to a charity (otherwise known as a Qualified Charitable Distribution (or QCD) can help mitigate this uptick in taxation. 

Why revisit QCDs now?  

The Tax Cuts and Jobs Act (enacted late last year) made them more attractive.  The fact that taxpayers can take the greater of their itemized deductions or the standard deduction has not changed, but a near doubling of the standard deduction (along with the end of miscellaneous deductions and a new limit for state and local taxes of $10,000), means that more taxpayers will take the standard deduction in the future. 

How will more standard deduction taxpayers make QCDs more attractive?  

Charitable giving has been one of the more popular itemized deductions in the tax code.  Once Standard Deduction taxpayers realize there is no longer a material tax benefit from their itemized giving, they will look for alternatives.  

If you take the standard deduction and also happen to have a required Traditional IRA distribution, donating the required distribution (or any portion of it) directly to a charity (instead of writing a check yourself) effectively makes the contribution deductible again.

How do QCDs work again?  

Required Traditional IRA distributions, up to $100,000, can be given directly to a qualified charity without incurring any tax due.  It’s tax-free money to the charity and a non-taxable distribution for the taxpayer, yet still satisfies the taxpayer’s distribution requirement (or a portion of it). Although it’s not technically reported as a deduction, avoiding taxation on the required distribution is effectively the same thing.  

QCDs have been around since 2006 but they will be much more prevalent now.  For standard deduction taxpayers with required distributions from a Traditional IRA, it’s time to consider switching all charitable giving to direct gifts from a Traditional IRA.  

Dustin J. Smith, CFP®

The above explanation is summarized. It is not all inclusive. Please confirm all specifics with your tax professional. For a more detailed summary of the 2018 Tax Laws alluded to above take a look at this post from January.

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