Dinse Brief: How 70 ½ Year-Olds Can Make Charitable Distributions Directly From a Retirement Account and Receive a Tax Benefit
Malory Lea and Dan Sharpe
Charitable contributions have long been tax-favored. Federal and Vermont taxpayers who itemize their deductions reduce their Federal and Vermont taxable income with contributions to United Way, American Red Cross, churches and synagogues, and other charitable, religious and educational organizations. After taking into account the state and Federal deductions, a charitable gift of $1,000 by a Vermont taxpayer in 2017 might have “cost” only $700 as a result of a reduced overall income tax liability of $300.
For 2018, the out-of-pocket cost of charitable contributions will rise significantly. The dramatic increase in the Federal standard deduction from $12,700 to $24,000 for married, joint tax filers and from $6,350 to $12,000 for single taxpayers means that many taxpayers will no longer itemize deductions. More taxpayers will no longer receive any tax benefit from making charitable contributions. While there are many reasons to be charitable, a tax deduction provides a valuable monetary incentive for taxpayers to make these contributions. Charitable organizations are understandably worried that this increase in the standard deduction will reduce donations.
Individuals who have reached age 70 ½ and have individual retirement accounts (“IRAs”) are required to take minimum distributions from their IRAs. The “required minimum distribution” or “RMD” is often calculated by the trustee or custodian of an IRA. The amount is based on the immediately prior year-end value of the account and the IRA-holder’s age.
A special rule for IRAs applies to charitable distributions made after the account holder reaches age 70 ½. Distributions made directly by an IRA trustee or custodian to a tax-qualified charity for an account-holder who has reached age 70 ½ are “Qualified Charitable Distributions” or “QCDs.” QCDs are not only excluded from a taxpayer’s gross income, but they are included in meeting the required minimum distribution from your IRA. Double counting is not permitted. To the extent a QCD is excluded from gross income, a charitable deduction may not also be claimed.
This special rule, limited to $100,000 annually, allows charitably-minded individuals subject to the RMD rules to avoid Vermont and Federal income taxes on the charitable distribution, avoid the loss of an itemized deduction that might result from the increased standard deduction, and meet their RMD requirement.
If you are subject to the RMD rules for your IRA for 2018 and want to take advantage of the special QCD rules, you must act in concert with your IRA trustee or custodian in advance of the year end. Contact Malory Lea at email@example.com or 802-864-5751 for more information or assistance.