Take-Away: As we begin the annual chore of completing our income tax returns for 2018, many will be surprised with regard to the impact of the 2017 Tax Act on their federal income tax liability for 2018. While an individual’s standard deduction was essentially doubled, ($24,400 in 2019 for a married couple) their personal exemption was eliminated at the same time. Add to those changes the ‘cap’ that is now imposed on the tax deductibility of state income, sales, and real property taxes paid of $10,000, and many may find themselves actually paying more federal income tax when they no longer itemize and rely on the ‘doubled’ standard deduction.  With many individuals no longer itemizing their tax deductions on their income tax returns we can expect to see a surge in the use of qualified charitable distributions (QCD) with direct payments from an IRA to charities, since the practical effect of a direct QCD payment is a 100% itemized income tax deduction.

Key Point: An individual who is eligible to make a qualified charitable distribution from his/her IRA does not include that distribution from their IRA in their reported taxable income for the year. The result is, in effect, a 100% income tax deduction. The individual is thus able to use the ‘doubled’ standard deduction for their income tax reporting and also remove from their taxable income all qualified charitable distributions in lieu of taking their required minimum distribution (RMD) for the year.

Rules:  We have covered qualified charitable distributions in the past, so I will not dwell too much on them. The following are the important requirements to remember when an individual makes a qualified charitable distribution (QCD) from an IRA.

  1. The individual must be over age 70 ½ when he/she makes the QCD. Not just ‘in the year of;’ they must actually be over that age when they make their QCD.
  2. The QCD must be made in the calendar year in which the individual attains age 70 ½, or older
  3. An individual who attained age 70 ½ in 2018 cannot wait until April 15, 2019 in which to make the QCD. The QCD must be made by December 31, 2018 in order to be effective. It cannot be applied retroactively.
  4. The QCD must be only from an IRA or Roth IRA. It cannot be made from a 401(k) or profit sharing account.
  5. A SEP IRA or SIMPLE IRA can be the source of a QCD but only if the SEP/SIMPLE is inactive at that time.
  6. An inherited IRA can also be the source of a QCD so long as the IRA beneficiary is then over the age 70 ½.
  7. The QCD must be made directly from the IRA, by the IRA custodian, delivered to the charity. The IRA owner cannot take a distribution from his/her IRA and then pay that distribution amount to the charity; it will be taxable to the owner.
  8. The charity that receives the distribution must be a tax exempt [501(c)] charity. No QCDs can be made to a donor advised fund or a private foundation.
  9. The maximum amount that can be annually be distributed from an IRA as a QCD is $100,000 per individual. A married couple can each make a $100,000 QCD from their respective IRAs, but they cannot spread that aggregated amount between them e.g. a husband cannot make a $150,000 QCD from his IRA and his wife make a $50,000 QCD from her IRA ($200,000 between the two). Husband is limited to a $100,000 QCD from his IRA.
  10. The QCD satisfies the individual’s required minimum distribution (RMD) from his/her IRA for the year. That QCD will not, however, also satisfy an RMD that the same individual might have with regard to a separate 401(k) account for the year.
  11. A QCD is not included in the individual’s taxable income for the year. Consequently, if the QCD is not reported as part of the individual’s taxable income, there is no corresponding charitable income tax deduction either.
  12. Timing is everything. A QCD follows the first-dollars-out RMD Once age 70 ½ is reached, the first dollars withdrawn from an IRA are treated as the individual’s required minimum distribution for the calendar year. Example: Taxpayer’s RMD for the year is $35,000. Taxpayer withdraws $20,000 on February 15 for travel to Hawaii. On December 1 Taxpayer intends to make $30,000 of QCDs from his IRA in order to reduce his taxable income for the year. The initial $20,000 withdrawal in February satisfied part of the Taxpayer’s RMD for the year. The balance of his RMD ($15,000) can be satisfied using QCD’s on December 1. But if the full $30,000 is distributed on December 1, $15,000 will still be taxable income to the Taxpayer ($15,000 is the balance of his RMD, the other $15,000 just ordinary taxable income.) While the direct payment to the charity might be tax deductible to the Taxpayer, that deduction might be lost if he is uses the standard deduction for the year.

Tip: Once an individual is faced with taking RMDs, it is best to make the first-dollars-out of the IRA QCDs. Therefore, whenever possible, make QCD’s early in the new calendar year in order to avoid the risk of missing the full RMD off-set using QCDs.

Conclusion: I recognize that this is a ‘repeat’ of earlier ‘missives’ on QCDs. But these are important rules to keep in mind, especially and when counseling clients with regard to both the opportunity to make QCDs in order to reduce their income tax liability for the year, and also the importance of when to make the QCD to have them applied against the individual’s RMD obligation for the calendar year.