pre-tax retirement

Tax-Savvy Seniors Use IRA Withdrawals to Make Deductible Donations


Tax guru Julian Block discusses updated retirement plan rules for 2020 and offers some tips seniors can use to save money on their taxes.

Jul 13th 2020
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Retirees 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).

Long-standing rules require individuals who move money into IRAs and other tax-deferred retirement plans to begin to make annual withdrawals once they reach a specified age. Recent legislation changed the starting age for these mandatory subtractions (RMDs) from 70 ½ to 72, beginning in 2020.

Another helpful change for seniors: They can opt not to make RMDs for 2020. But seniors older than 70 ½ who choose to skip RMDs still can use them to make QCDs for 2020.

Another new break that’s also only for 2020: All taxpayers can deduct as much as $300 for charitable donations without having to itemize on Form 1040’s Schedule A.

Retirees may wonder whether QCDs are worth the bother, even if they actually cut taxes on RMDs. After all, the law allows donors to trim taxes when they itemize on Schedule A.

I tell donors 70½ or over to 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. Also, the law permits a married person’s spouse 70½ 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: Alice’s IRA custodian is Vanguard. She decides not to skip her 2020 RMD. It’s going to be slightly north of $50,000. Alice and husband Henry, are regular givers to the YMCA in Rye, New York, and other charities; they 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: Switch from itemizing to claiming one of the standard deduction amounts that are available to filers who don’t itemize and are increased annually to reflect inflation.

Why switch? 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 they greatly expand the standard deduction amounts.

2020’s amounts 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. Additional amounts for individuals who are older than 65 (a group that includes Alice and all other RMD recipients), as well as for those who are legally blind: $1,300 for a married person, whether filing jointly or separately, and $1,650 for single persons and heads of household.

2020’s standard deduction for Alice and her hubby: $27,400 ($24,800 for both, plus $1,300 for her and $1,300 for him).

Why it pays for Alice and Henry to abandon itemizing for 2020: The couple previously paid off their mortgage: they no longer can deduct payments for mortgage interest. $10,000 is the most they can claim for property taxes and state income taxes. No deductions for medical expenses; their anticipated uninsured outlays for medical care are insufficient to surpass the nondeductible threshold of 7 1/2 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 their decision to skip Schedule A and use the standard deduction mean they forfeit any tax break for donations? Not if they tell Vanguard to use Alice’s RMDs to make QCDs of $17,000.

Vanguard will send Alice 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 for everyone, except the IRS: Alice’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 about QCDs: Donors should get things done sooner, rather than later. Each December, they 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 350 and counting). 

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