QCDs: A Charitably-Minded, Tax-Efficient Strategy

By Kevin T. Smith, CFP®, CTFA, CDFA™

In the Financial Services field we love to use acronyms. RMD (Required Minimum Distribution), YTM (Yield to Maturity), and AGI (Adjusted Gross Income) are common ones that you may have heard. However, if you are older than age 70 ½, have a Traditional IRA, and make charitable gifts annually, a QCD (Qualified Charitable Distribution) is a good acronym to know.


QCDs – A Brief Background
Individuals with monies in a Traditional IRA, who are older than 70 ½, draw their Required Minimum Distribution each year. These distributions are treated as taxable income and included in your AGI. However, since 2006, individuals have had the ability to direct these required distributions (up to $100,000) to a qualified charity of their choice and exclude the amount from their taxable income each year. This strategy is referred to as a Qualified Charitable Distribution.

However, even though you are making a charitable gift, you may not include this amount in your itemized deductions. In other words, you cannot “double dip.”

Why the Popularity Now?
With Congress passing the Tax Cuts and Jobs Act in late 2017, it doubled the standard deduction for individuals and joint filers ($12,000 in 2018 for individuals and $24,000 for married filing jointly). This significantly reduces the number of individuals who will be itemizing their deductions. For those taxpayers who were itemizing their charitable gifts and are now taking the standard deduction, the tax benefit of the charitable gift is lost.

This has created more popularity for the QCD from IRAs and may provide the following benefits:

  1. Satisfy some, or all, of your Required Minimum Distribution
  2. Reduce your taxable income which can potentially:
    • Reduce the amount of tax on your Social Security benefits
    • Reduce the costs of Medicare Part B and Part D premiums
    • Help you avoid exposure to the 3.8% net investment income tax
    • Allow you to qualify for certain tax credits that have income caps

Please note these additional QCD strategy items:

  1. The charity must be a qualified charity per IRS standards (it cannot be a private foundation or donor advised fund)
  2. The distribution must be made directly from your IRA trustee to the charity (check payable to the charity)
  3. The QCD can be accomplished with Inherited IRAs where the beneficiary receiving the distribution is older than 70 ½

If you have already satisfied your RMD for 2018, you can look to the 2019 tax year and beyond as Congress has made the ability to do a QCD permanent. If you have questions on whether the QCD from your IRA is a strategy that may benefit you, we recommend that you speak with your tax professional.