Everett Collection
Q. I’m 67 and retiring this year. My understanding is that because of the new standard deduction, giving to charity out of an IRA is going to be smarter for retirees. Is that right?
— Pete in Bakersfield
A. Pete, that’s mostly right. The larger standard deduction means fewer people will itemize and that will make qualified charitable distributions, or QCDs, directly from IRAs attractive to more people. However, eligibility to make a QCD is dependent upon age, not your work status.
A QCD can only be done on or after the date on which you turn 70 ½. At that point, you can make Qualified Charitable Distributions (QCD) to qualified charities totaling up to $100,000 a year from your IRA. None of the donation is treated as taxable income yet it counts toward your required minimum distribution.
Read: What is an RMD? And what happens if you don’t take it?
For the donation to qualify as a QCD, the check must be payable to a qualified charity, not you. If you take a check made payable to you and then donate the money to the charity, the full amount of the check is taxable to you but you may not get a full deduction for the donation.
In many cases, the company holding the IRA will send the check (again payable to the charity not you) to you so you can present it to the charity. Other companies will mail the check directly to the charity and some will provide a checkbook so you can write checks to the charity yourself.
As I alluded to a moment ago, a full deduction isn’t always the result of a normal charitable donation. The reason; charitable donations are an itemized deduction on Schedule A of your tax return.
Say that exclusive of the contemplated QCD, you and your wife have $10,000 of itemized deductions. Since the standard deduction is $26,600 if you are both age 65 or older, you wouldn’t itemize at all.
If you take $30,000 from your IRA personally and then donate it, your total itemized deductions are now $40,000 so you would use that instead of the $26,600 standard deduction. You incurred $30,000 of additional taxable income, but the $30,000 donation only increased your deduction $13,400 ($40,000 less the $26,600 standard deduction you already had). The net effect is an increase in your taxable income of $16,600. Put another way, the first $16,600 of the $30,000 donation is not deductible.
If you instead make a $30,000 QCD, there is no income recognition so your taxable income is unaffected essentially making all of the $30,000 gift deductible.
Further, the lower gross income that results from a Qualified Charitable Distribution can increase the amount of deductible health expenses or the reduce the taxability of Social Security benefits to name two common items affected by gross income.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.