Over age 70.5? Make sure you consider qualified charitable distributions

Before planning for qualified charitable distributions (QCDs), it’s important to have a general understanding of them. My colleague explained them well in a previous OneBite blog that I encourage you to read for a refresher.  

While the passage of the SECURE Act in late 2019 delayed the required minimum distribution (RMD) beginning age to 72, QCDs can still be made after age 70.5. Although, they now must be reduced by any contributions to traditional IRAs made during or after the year you turn 70.5.

Also, the subtle advantage our previous blog described of using a QCD instead of receiving an IRA RMD and subsequently gifting cash has grown more significant with the Tax Cuts and Jobs Act (TCJA). 

Among other things, TCJA eliminated or capped some common itemized deductions while also increasing the standard deduction. It’s estimated one in ten taxpayers will now itemize deductions, down from approximately one in four prior to the TCJA.1 If you no longer itemize deductions, you now have a very limited charitable gift deduction to offset your RMD income.

Note: The Coronavirus Aid, Relief, and Economic Security (CARES) Act recently created an “above-the-line” deduction for up to $300 in cash gifts to qualifying charities that taxpayers can use if they do not itemize deductions, but that will likely be far less than a taxpayer’s RMD.

Seeing the qualified charitable distribution in action

Considering those details, here are a few examples of ways that QCDs can benefit taxpayers at many different income levels. Note that they focus solely on federal tax savings, but additional state tax savings are also possible.

QCD scenario 1

In this scenario, we have a married couple, both age 73, with $25,000 of IRA RMDs, $30,000 of gross Social Security benefits and $40,000 of ordinary interest and dividends. 

They pay $12,000 in state property and income taxes and give $10,000 to charity ($20,000 total itemized deductions with state and local taxes capped at $10,000 under the TCJA, so they’ll use the $27,400 standard deduction).

Take RMD and make separate charitable gifts

Use QCD for $10,000 charitable gifts

Ordinary interest & dividends

$40,000

$40,000

Taxable Social Security

$25,500

$25,500

IRA income

$25,000

$15,000 ($25,000 – $10,000 QCD)

Above-the-line charitable gift

$   (300)

$         0

Adjusted gross income

$90,200

$80,500

Standard deduction

$27,400

$27,400

Taxable income

$62,800

$53,100

Federal tax

$7,141

$5,977

Scenario 1 shows the couple is able to avoid income on the entire $10,000 QCD, not just the $300 above-the-line charitable deduction, which lowers the final taxable income by $9,700 and saves them $1,164 at their 12% marginal tax bracket.

QCD scenario 2

In this scenario, we have a married couple, both age 73, with $25,000 of IRA RMDs, $30,000 of gross Social Security benefits and $15,000 of ordinary interest and dividends.  

They pay $4,500 in property taxes and give $4,000 to charity ($8,500 total itemized deductions, so they’ll use the $27,400 standard deduction).

Take RMD and make separate charitable gifts

Use QCD for $4,000 charitable gifts

Ordinary interest & dividends

$15,000

$15,000

Taxable Social Security

$15,350

$11,950

IRA income

$25,000

$21,000 ($25,000 – $4,000 QCD)

Above-the-line charitable gift

$   (300)

$         0

Adjusted gross income

$55,050

$47,950

Standard deduction

$27,400

$27,400

Taxable income

$27,650

$20,550

Federal Tax

$2,923

$2,071

In scenario 2, the taxpayer benefits two ways. First, similar to scenario 1, making their charitable gifts through a QCD reduces taxable income by that amount, which far exceeds the $300 maximum above-the-line charitable deduction they otherwise would have received. 

The second benefit is that the taxpayer is in an income range where varying amounts of Social Security will be taxed. Social Security is partially taxable, up to 85% of the gross Social Security benefit, based on other income. Lowering their other income in this example also lowers the amount of taxable Social Security benefits. While the taxpayer is in the 12% bracket as in scenario 1, they save $852 on the $4,000 charitable gift, which is a 21.3% benefit.

QCD scenario 3

In this scenario, we have a married couple, both age 73, with $60,000 of IRA RMD, $40,000 gross Social Security benefits, $140,000 of ordinary interest and dividends, and $45,000 tax-exempt interest. 

They pay $10,000 in state and local taxes and give $15,000 to charity ($25,000 total itemized deductions, so they’ll use the $27,400 standard deduction).

Take RMD and make separate charitable gifts

Use QCD for $15,000 charitable gifts

Ordinary interest & dividends

$140,000

$140,000

Taxable Social Security

$34,000

$34,000

IRA income

$60,000

$45,000 ($60,000 – $15,000 QCD)

Above-the-line charitable gift

$   (300)

$         0

Adjusted gross income

$233,700

$219,000

Standard deduction

$27,400

$27,400

Taxable income

$206,300

$191,600

Federal tax

$37,671

$34,143

Again, two things are at play in scenario 3. 

First, the federal tax savings amount of $3,528 reflects the $15,000 income reduction due to the QCD exceeding the $300 above-the-line charitable deduction and the taxpayer being in the 24% marginal tax bracket. 

Additionally, the income-related monthly adjustment amount (IRMAA) comes into play. IRMAA is an increase in a taxpayer’s Medicare Part B and Part D premiums because their modified adjusted gross income (essentially the adjusted gross income from the tax return plus tax-exempt interest) from two years prior exceeds certain levels.

The tiers can be found on the Medicare.gov website,2 and are now indexed for inflation. Currently, for 2020 Medicare costs based on 2018 income numbers, one of the tiers occurs at $272,000. Once you cross $272,000 of modified adjusted gross income by $1, your monthly Part B premium goes up by an additional $86.80 per person, and your Part D premium goes up by an additional $19.20 per person. 

In total, then, for a married couple, crossing $272,000 of modified adjusted gross income creates an additional cost of $106.00 per person, per month, or $2,544 total for the year. Using the QCD in this scenario lowers the modified adjusted gross income (adjusted gross income plus tax-exempt interest) from $278,700 to $264,000, bringing the taxpayer below the current tier of $272,000. The savings of using the QCD is then the $3,528 of tax savings plus the $2,544 of Medicare premium costs for a total of $6,072, or over 40% of the $15,000 QCD.

The benefits of charitable giving

While none of the above scenarios involve taxpayers between age 70.5 and 72, QCDs also make sense in those years for taxpayers who do not otherwise itemize deductions and wish to lower their future RMDs. The CARES Act also suspended RMDs for 2020. Like for those between the ages of 70.5 and 72 who do not yet have RMDs but can still use QCDs, a QCD could still be considered in 2020 to lower future RMDs for those wanting to continue making charitable gifts.

The recent TCJA, and to a lesser extent the SECURE Act, have opened the door for QCDs to provide larger benefits to a greater number of taxpayers. Nearly everyone over age 70.5, especially those making charitable gifts and unable to itemize deductions, stands to benefit from using QCDs as part of their charitable giving strategy.

Not sure how to get started? We can help. Contact an advisor to learn more about qualified charitable distributions.

Start the conversation

Consider the qualified charitable distribution

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services and fees is set forth in Wipfli Financial’s current Form ADV Part 2A brochure, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Mark Albers
Mark Albers

CPA, MST, CFP® | Senior Financial Advisor

Mark Albers, CPA, MST, CFP®, is a Senior Financial Advisor for Wipfli Financial Advisors in Green Bay and Appleton, WI. Mark specializes in estate, retirement, tax and charitable giving planning for individuals and families.

No Comments Yet

Comments are closed

Over age 70.5? Make sure you consider qualified charitable distributions

time to read: 5 min