Charitable Giving for Retirees

Posted on December 3rd, 2019

Retirees age 70.5 and older must take required minimum distributions (RMDs) annually from their Traditional IRA accounts. The RMDs are counted as taxable income in the year distribution is taken. Combined with Social Security benefits and other income sources, RMDs often push many people into higher tax brackets.  Retirees that find themselves in these brackets may be looking for ways to reduce their taxable income, qualified charitable distributions (QCDs) are one way to do it.  

How Do Qualified Charitable Distributions Work?

QCDs are available to taxpayers age 70.5 and older who make a charitable donation directly from their IRA to a qualified charity. The charitable donation counts toward satisfying the RMD that a person must take from their Traditional IRA (this does not include SEP or SIMPLE IRAs), and are tax-free because they are not included gross income.

Taxpayers can exclude up to $100,000 in qualified charitable distributions (QCDs) from their gross income each year. For those filing a joint return, each spouse (70½ or older) can exclude $100,000 in QCDs.

Those that itemize deductions should be aware that QCDs cannot be deducted as a charitable contribution because the QCD is already excluded from gross income.  

However, fewer taxpayers are able to reduce their taxes by itemizing. The standard deduction is substantially higher than it used to be, and many itemized deductions have been eliminated or restricted. For example, a married couple over age 65 filing jointly would need to have itemized deductions over $27,000 (for 2019) in order to see a tax benefit from an itemized charitable contribution.

Benefits of Qualified Charitable Distributions

A QCD allows a taxpayer to claim the standard deduction and exclude the QCD from income.

For those that do not itemize, donating directly to a charity from their IRA is the only way to get a tax benefit from their donation. 

The reduced income from the charitable donation will result in a lower AGI.  The lower AGI could help some folks reduce or avoid the high-income surcharge on Medicare parts B and D. It may also reduce the percentage of Social Security income subject to tax.

The charitable donation must be made to a charity approved by the IRS.  QCDs cannot be made to private foundations, donor-advised funds, or supporting organization. A gift cannot be made in exchange for a charitable gift annuity or to a charitable remainder trust. 

Taxpayers that are considering making a QCD should check with their tax advisor to make sure the charitable donation is tax-advantaged so they are not subject to penalties for under-payment of taxes.

Year-End Planning

For retirees that typically wait until the end of the year to take their RMDs, now is a good time to consider filling up some of their RMD bucket with a charitable contribution.

Those that have already taken RMDs this year may want to consider itemizing instead. They should speak with their tax professional to see if making a QCD would be appropriate for the next tax year.

Ultimately, QCDs are well suited for those that do not need the income from their RMDs for living expenses or other needs, find they no longer benefit from itemizing, and would like to reduce their tax liability.