When the 2917 Tax Cuts and Jobs Act raised the standard deduction for taxpayers to $24,000 for couples ($12,000 for singles), and lowered individual tax rates, an unintended effect was to reduce the tax benefit of making charitable donations. Fewer taxpayers were itemizing, which means their donations didn’t count as deductions. The Urban-Brookings Tax Policy Center has estimated that the law reduced the marginal tax benefit of giving to charity by over 30 percent, and raised the after-tax cost of donating by about 7 percent.
Some taxpayers, however, are able to avoid these limits. How? As most of us know, people age 72 and older who have individual retirement accounts (IRAs) are required to take required minimum distributions (RMDs) out of the account—and those percentages increase with age. If they’re charitably inclined, and otherwise frustrated by the new tax rules, they can take their distribution in the form of a qualified charitable distribution (QCD). The distribution would be a direct transfer to the charitable organization of their choice, up to a limit of $100,000.
How does that benefit them? If the QCD is made directly to the charity, it is not counted as income for federal tax purposes—and thus reduces the income that the taxpayer has to include on the 1040 form. In effect, the QCD gives back the full charitable deduction that was otherwise lost to the tax reform writers.
Due to a quirk in the law, IRA owners as young as age 70 1/2 can make QCDs, even though they aren’t required to take RMDs until age 72. And the option is not only for IRA owners. IRA beneficiaries—that is, people who have inherited IRAs, and have to take out the money within 10 years, can also make QCDs if they choose.