QCDS: Tax Saving Strategy

Brian specializes in retirement planning and comprehensive wealth management for affluent families and individuals and investment/endowment management services for many of Central Maine’s non-profit institutions and has been a member of LPL’s Chairman’s council since 2014.

Brian Bernatchez, Founder and Managing Principal

Golden Pond Wealth Management

While most taxpayers will benefit in 2018 from a reduction in tax rates, the new tax law also means it is less likely that you will itemize your deductions and instead claim the standard deduction. This is where a qualified charitable distribution (QCD) can help.

Under the new 2018 tax law, the standard deduction for a married couple is $26,500 ($24,000 plus $1,250 each for being over age 65). In addition, state and local taxes are now capped at $10,000. If you donate to charity, this could mean you will lose some or all of the benefit of the charitable deduction.

A QCD is a tax-savvy strategy which allows donors who have reached the age of 70.5 to transfer up to $100,000 per year per person directly from your IRA to your favorite charities. Any amount processed as a QCD counts toward the required minimum distribution. In addition, the QCD bypasses your 1040 which may mean a reduction or elimination of the net investment income tax and/or a possible reduction in the taxation of your social security benefits…and you still get to take full advantage of the increased standard deduction! For non-itemizers, donating to a charity via a direct transfer out of the IRA is the only way to get a tax benefit for your donation.

Let’s look at an example to show the benefits of the QCD:

Randy and Helen are both age 75 and give regularly to the Harold Alfond Center for Cancer Care at MaineGeneral. In 2018, they are planning to donate $15,000 and their required minimum distribution is $30,000. Their total itemized deductions (not including charitable contributions) amount to $11,000 so they are planning to take the new standard deduction of $26,500. If they write a check out to MaineGeneral for $15,000, they will still be forced to take the standard deduction because their total itemized deductions of $26,000 do not exceed the dramatically increased standard deduction of $26,500. This means they would get absolutely no tax benefit for their $15,000 donation. If instead, they arrange to have the $15,000 sent to MaineGeneral directly from their IRAs the transfer will not only count toward their required minimum distributions, (assuming a 22% federal tax bracket) it will save them $3,300 in taxes!