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There is a provision in the income tax laws for American taxpayers who are 70 1/2 years old and older. It’s the “Qualified Charitable Distribution” or QCD. It works or provides tax benefits for taxpayers who have an annual “Required Minimum Distribution” or “RMD” and make donations to charitable organizations. This tax benefit became really important with the “Tax Cuts and Jobs Act” that was enacted on December 17, 2017. The TCJA became effective on January 1, 2018, and if not extended, will expire on December 31, 2025.
Prior to the enactment of the TCJA taxpayers made their charitable donations and entered the data on Schedule A (“Itemized Deductions”) of their individual tax returns, usually a Federal Form 1040, along with medical expenses, state and local taxes, mortgage interest, etc. Then the taxpayer compared the itemized deductions total to the standard deduction total and used the higher amount. However, the TCJA substantially increased the standard deduction for all taxpayers wherein, it may no longer be beneficial to use the actual itemized deductions. To illustrate, I’ll provide examples for two different taxpayers, both are “Married Filing Jointly”, have an RMD of $100,000, donate a total of $15,000 for all of their charities. Their “Standard Deduction” is $25,100. Their “Taxable Income” is $200,000 without the tax benefit of the QCD.
Taxpayer A– does not use the QCD. Receives the required $100,000 RMD, records the $15,000 in donations on Schedule A. However, the total “Itemized Deductions” are less than the “Standard Deduction” His/Her “Taxable Income” is $200,000.
Taxpayer B-has his/her IRA Custodian send checks directly to each of the charitable organizations. He/she receives the full benefit of the QCD. However, his/her “Taxable Income” is now reduced by $15,000 (the QCD) to $185,000. He/she also used the “Standard Deduction”.