retirement plans

How to Use a Retirement Account for Tax Breaks


Do qualified charitable distributions (QCDs) actually cut taxes on RMDs?  And assuming they do, is it worthwhile for retirees to bother with QCDs?

Dec 3rd 2019
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Individuals with traditional IRAs need to familiarize themselves with strict rules that kick in once they turn 70 1/2, the age at which they must begin to make annual withdrawals from their tax-deferred accounts. The IRS characterizes those mandatory subtractions as required minimum distributions (RMDs).

A reminder for soon-to-be retired individuals: Congress might soon increase the starting age to 72.

Retirees frequently ask me whether they should act on the advice of friends who urge them to use some of their RMDs to make donations with, in IRS lingo, qualified charitable distributions (QCDs).Their key questions: Do QCDs actually cut taxes on RMDs?  And assuming they do, is it worthwhile for retirees to bother with QCDs?

They’re reasonable questions. After all, the law allows retirees to trim taxes when they claim itemized deductions for charitable contributions on Form 1040’s Schedule A, a break that has long benefitted them.

Here’s my standard response to philanthropic retirees who no longer itemize: Consider the use of QCDs that go directly from their IRAs to charities that they select. They’re able to make QCDs of up to $100,000 per year to one or more charities and still take standard deductions, as explained below.

While their QCDs count as part of their RMDs, the IRS doesn’t tax QCDs. So, yes, they do cut taxes on RMDs.

An example: Client Clarice receives her RMDs from Vanguard. This year’s RMD is going to be slightly north of $50,000. Clarice and husband Hannibal, regular givers to schools, churches, hospitals and other charities, want to send checks for $20,000 to their favorite philanthropies.

What they shouldn’t do is to send their own checks. What they should do is to send QCDs. Something else they ought to do is switch from itemizing to claiming standard deductions.

Why QCDs and why switch? Because Congress enacted the Tax Cuts and Jobs Act in late 2017, the largest overhaul of the U.S. tax code since 1986, when President Reagan signed the Tax Reform Act.

The 2017 legislation includes provisions that greatly expand the standard deduction amounts (they’re indexed, meaning they’re increased annually to reflect inflation). But the legislation also erased or curtailed many long-cherished itemized write-offs, including state and local income and property taxes.

2019’s standard deduction amounts: $24,400 for married persons filing jointly and qualifying widows/widowers (surviving spouses who qualify for the same breaks as married couples for two years after a spouse dies); $18,350 for heads of household; and $12,200 for single persons and married persons filing separate returns.

2019’s additional amounts for individuals who are older than 65 (a group that includes Clarice and all other RMD recipients), as well as for those who are legally blind: $1,300 for marrieds filing jointly or separately and surviving spouses and $1,650 for single persons and heads of household.

2019’s no-questions-asked standard deduction for Clarice and hubby: $27,000 ($24,400 for both, plus $1,300 for her and $1,300 for him).

Here’s why I tell them it’s a no-brainer to eighty-six itemizing. Clarice and her mate started off 2019 by vamoosing from California (high income tax) and setting up camp in Texas (no income tax). They paid cash for their new dwelling. Their real estate taxes are modest.

As for medical expenses, moving makes no difference. Their anticipated uninsured outlays for medical care are insufficient to surpass the current nondeductible threshold of 10 percent of adjusted gross income. Note, though, that the previous threshold of 7.5 percent might be restored by an election-year Congress that’s sensitive to the needs, real or imagined, of seniors.

The couple’s only significant deduction is that $20,000 they intend to give to charities. Does my advice to use the standard deduction mean that they forfeit any tax break for their donations?

Not if they heed my advice to do the following: Tell Vanguard to use Clarice’s RMDs to make QCDs of $20,000, something they can do at the year’s start, throughout it, or at its end.

Vanguard will send Clarice checks for $20,000 payable to the charities (details matter; they can’t be payable to her) that she then forwards to the payees. Happy endings: Clarice’s taxable RMDs drop from about $50,000 to about $30,000, and the couple qualifies for a standard deduction of $27,000.

My homily for RMD recipients who intend to make QCDs: Get things done sooner, rather than later. Each December, retirees inundate Vanguard and other IRA administrators with last-minute requests for QCDs.

I’ll end with an explanation of why I mention Vanguard, an outfit renowned for its low-management fees. For several decades, Vanguard has flawlessly handled hundreds of RMDs for my wife and me (our payouts are monthly), as well as our occasional QCDs. Another plus: It doesn’t charge for our quickly-executed QCDs.  

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting).