With the new tax law, many people will no longer itemize. So when they think about taking out a mortgage, paying property taxes, or making charitable deductions, they should no longer assume some kind of tax “discount”. This is because the standard deduction has been raised to $12,000 for singles and $24,000 for married couples, making itemizing for some people, particularly retirees on fixed incomes, obsolete.
So, interest, taxes, and charitable deductions are not really “discounted” for them any longer.
But those over 70 1/2 have a way around the charitable deduction by supporting charities directly from their IRA. It’s called a Qualified Charitable Distribution and it counts toward the annual Required Minimum Distribution. The Qualified Charitable Distribution must be sent directly to the charity.
Checkbook vs. QCD Illustrated
To illustrate, take Betty and George, 75 and 78, who have a paid-off house, a few medical expenses, and low property taxes, but give generously to their church – $10,000 a year. Between pensions, Social Security, and investment income, they make $80,000. On top of that, their Required Minimum Distributions from IRAs total $20,000.
Normally they write a check to the church in December. At the same time, they take their Required Minimum Distributions from their IRAs. Compare how they will do by using their IRA instead of their checkbook for the charitable deduction:
If They Use Checkbook
| Pensions, Soc Sec, Invstmts $80,000 |
| Required Minimum Distribution +20,000 |
| Adjusted Gross Income $100,000 |
| Standard Deduction -24,000 |
| Taxable Income $76,000 |
| Taxes (12% bracket) – 9,120 |
| Net After Taxes $66,880 |
| Charitable Contribution Check -10,000 |
| Net Cash Flow $56,880 |
| If They Use QCD from IRA |
| Pensions, Soc Sec, Invstmts $80,000 |
| Required Minimum Distribution (20K minus QCD of 10K) +10,000 |
| Adjusted Gross Income $90,000 |
| Standard Deduction – 24,000 |
| Taxable Income $66,000 |
| Taxes (12% bracket) -7,920 |
| Net After Taxes/Cash Flow $58,080 |
Using the QCD instead of the checkbook saves Betty and George $1,200.
To use the QCD, instead of writing the check in December, Betty and George would ask their IRA custodian to send 1/2 of their Required Minimum Distributions to the church, and half to their bank accounts. (Or they could instruct specific dollar amounts.)
But They LIKE Writing a Check
QCDs, though, are a little more complicated than writing a check, a problem for some older people. What if Betty and George are a bit stuck in their ways?
“But I like the satisfaction of writing the check,” they might say. One option is to replace the check with a nice card to the church that says something like, “We instructed our IRA custodians to send our annual pledge of $10,000 directly to the church this year. Please notify us if it does not arrive by December 15. Signed, George and Betty.”
QCD’s are a little more work and coordination, but well worth the trouble to keep the deduction.
For more technical rules and smart uses of QCD’s, see also: https://www.kitces.com/blog/qualified-charitable-distribution-qcd-from-ira-to-satisfy-rmd-rules-and-requirements/
Contact us if you’d like to talk taxes or other financial planning topics.
