Tax-Savvy Seniors Use IRA Withdrawals to Make Deductible Donations 

Your tax-savvy retiree clients may wonder whether they should use some of their required minimum distributions (RMDs) to make deductible donations that, in IRS lingo, are qualified charitable distributions (QCDs).

Mar 9th 2020
Share this content
retirement plans
EXTREME-PHOTOGRAPHER_istock_retirementplans

Back in early December, our columnist and tax guru Julian Block discussed how retiree clients can use a retirement account for tax break. Ever vigilant, Mr. Block has found that due to subsequent legislation, there are updates to share on this matter. As such he has composed the following article for the benefit of your retiree clients.

Long-standing rules require individuals to make annual withdrawals from their IRAs and other tax-deferred retirement accounts once they turn 72. (70 ½ was the required age for 2019 and earlier years.) The IRS characterizes those mandatory subtractions as required minimum distributions (RMDs).

Some of the questions your retiree clients may ask: Do QCDs actually cut taxes on RMDs? If so, are QCDs worth the bother? After all, the law allows donors to trim taxes when they claim itemized deductions for charitable contributions on Form 1040’s Schedule A.

My answer to donors 70 ½ or over: Use QCDs that go directly from their IRAs to charities that they select. They can make QCDs of up to $100,000 to one or more charities and take standard deductions that exceed their itemized deductions, as explained below.

Although the RMD age increased to 72, the QCD age remains 70 ½. Also, the law permits a married person’s spouse 70 ½ or over to transfer another $100,000 to charities from his or her IRAs. While QCDs count as part of RMDs, the IRS doesn’t tax QCDs. So, yes, they cut taxes on RMDs and are worth the bother.

An example: Clarice receives her RMDs from Vanguard. 2020’s RMD is going to be slightly north of $50,000. Clarice and husband Hannibal, regular givers to the Rye YMCA, schools, and other charities, want to send checks for $17,000 to their favorite philanthropies.

  • What they shouldn’t do: Send their own checks.
  • What they should do: Use her RMD to send QCDs of $17,000.
  • Something else to do for 2020: Switch from itemizing to claiming the standard deduction.

Why? Because recent legislation includes provisions that erase or curtail many itemized write-offs, such as capping at $10,000 deductions for state and local income and property taxes, and greatly expand the standard deduction amounts that are available to filers who don’t itemize.

Those amounts are increased annually to reflect inflation. 2020’s are: $24,800 for married persons filing jointly; $18,650 for heads of household; and $12,400 for single persons and married persons filing separate returns.

In 2020, there are 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 $1,650 for single persons and heads of household.

Also in 2020, there is a no-questions-asked standard deduction for Clarice and her hubby: $27,400 ($24,800 for both, plus $1,300 for her and $1,300 for him).

Why it pays for Clarice and Hannibal to abandon itemizing for 2020: The couple are renters, have no deductions for mortgage interest or property taxes, and $10,000 is the most they can claim for state income taxes. No deductions for medical expenses; their anticipated uninsured outlays for medical care are insufficient to surpass the nondeductible threshold of 7.5 percent of adjusted gross income. 

Their sole significant itemized deduction: That $17,000 they intend to give to the Rye YMCA and other charities.

Does skipping Schedule A and using the standard deduction mean they forfeit any tax break for their donations? Not if they tell Vanguard to use Clarice’s RMDs to make QCDs of $17,000.

Vanguard will send Clarice checks for $17,000 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 $33,000; the couple claims a standard deduction of $27,400, an amount that exceeds their allowable Schedule A deductions of, at most, $27,000.

A reminder for donors who make QCDs: Get things done sooner, rather than later. Each December, donors inundate IRA administrators with last-minute requests for 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). 

Related Articles

The Case for Deferring Monies Into a Roth IRA

How Long do Retirement Assets Need to Last?

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.