Will TCJA Encourage QCD?

When Congress was debating the merits of the Tax Cuts and Jobs Act of 2017 (TCJA) late last year, one of the items that took a lot of focus was the change to the Standard Deduction. The Standard Deduction was increased to nearly double what it was in years’ past. The deduction went from $12,700 in 2017 for joint filers to $24,000; for singles, the increase went from $6,350 to $12,000. Single filers over age 65 get an extra $1,600 deduction; married filers get to increase their Standard Deduction by $1,300 each if over age 65*. A byproduct of this change is that QCD (Qualified Charitable Distributions) from IRAs may become more popular than ever.

QCD basics

Here’s a brief rundown of the basics of QCDs: When you are at least age 70½ years old and subject to Required Minimum Distributions (RMDs) from your IRAs, you can opt to make distributions from your IRA directly to a qualified charity. The QCD distribution can be used to satisfy your annual RMD if you wish.

This doesn’t seem like such a big deal, does it? But the tax law has a nice surprise available to you if you use this option: the amount distributed as a QCD is never counted as taxable income on your tax return. So what?! you might say… who cares, I could make a charitable contribution and deduct it in my itemized deductions! No difference.

But that’s where you’re wrong. Since a QCD bypasses being counted as taxable income (above the line, on the front page of your 1040 form), it doesn’t increase your Adjusted Gross Income (AGI, the bottom line on the front page of your 1040). And keeping your AGI low is important for many other calculations on your tax return – such as medical expense deductions, miscellaneous deductions, and many credits. Using the QCD keeps that money out of the equation altogether!

Plus – this is the reason QCDs may become more popular than ever – since it’s not included as income, you don’t have to meet the limit of (now) $24,000 (plus $1,300 for each member of the couple over age 65) of itemized deductions for this charitable contribution to have an impact on your tax bottom line.

QCD Example

For example, let’s say your overall income (including your RMD of $5,000) is $55,000. If you take the distribution directly in cash and then hand $2,500 over to your favorite charity, your taxable income will work out to $28,400 (subtracting the $24,000 standard deduction and the extra deduction of $1,300 each for being over age 65 from your overall income).  The key here is that your itemized deductions are not enough to be greater than the standard deduction – and it’s harder to reach now that there is a limit of $10,000 on state and local tax, in addition to the fact that it’s doubled.

However, if you made a QCD of $2,500 to your favorite charity and then took the remaining $2,500 as cash, your overall income for the year would only be $52,500, since the QCD money isn’t counted. End result is that your taxable income will now be $25,900 ($52,500 minus the standard deduction of $24,000 and $1,300 apiece for being over age 65). You’ve satisfied your RMD, made the same amount of contribution to your favorite charity, and are paying less tax, because the standard deduction doesn’t change. Big win!

Of course, the larger the QCD the better – if you qualify, you might want to consider making all of your charitable contributions in this manner. The limit for QCD treatment is $100,000 per person per year, so you have a lot of headroom to work with.

I believe this is a rare opportunity to take advantage of the tax law, make significant donations to your chosen charity(ies), and pay less tax in the long run.

* Hat tip to the alert Bogleheads who pointed out I had neglected to include the additional standard deduction amounts for filers over age 65, which is everyone who this article pertains to! Thanks!