While the primary motivations for charitable giving have not changed, the tax implications for giving may have shifted meaningfully for many taxpayers. However, with wise planning, you can continue to maximize your charitable giving through strategic tax-minimization strategies.
Qualified Charitable Distributions (QCDs) from an Individual Retirement Account (IRA), also known as a Charitable IRA Rollover, remain an attractive giving strategy for many taxpayers, especially taxpayers who don’t itemize their deductions. If distributions are made from an IRA directly to a qualified charity, you avoid income tax on those QCDs, and the distribution counts toward your required minimum distribution.
For example, let’s imagine a couple with an annual giving goal of $8,000 who are taxed at the 32 percent marginal tax rate. If they were to satisfy their annual $8,000 giving by making a QCD (and ignoring any other strategies, like bunching or giving appreciated publicly traded stock) they could avoid $2,560 of taxes that they otherwise would have incurred if they took distributions from their IRA directly.
It is likely that the use of the QCD strategy will increase dramatically under the new tax law, as IRA assets represent such a significant source of wealth for so many taxpayers.
It’s important to be aware of certain restrictions on this strategy, including the requirement that the IRA owner must be 70 ½ or older. In addition, QCDs are limited to a maximum of $100,000 each year, and distributions must be made directly to a qualified charity.
Although, private foundations, donor-advised funds, and charitable remainder trusts do not constitute “qualified” charities, NCF can help facilitate such gifts through designated funds that name a single charity as the beneficiary of a fund. We can also establish multiple designated funds so that, if someone wants to make a QCD and give to two or three charities, he or she can simply create a separate designated fund for each charity.
The QCD strategy will continue to increase dramatically, as IRA assets (and 401(k) and other qualified retirement plans that are converted to IRAs) represent such a significant source of wealth for so many taxpayers.
In addition, legislation has been proposed over the years that would increase the benefits and reduce the restrictions on this strategy – lowering the age requirement, increasing (or eliminating) the $100,000 maximum distribution, and expanding the definition of qualified charity to include donor-advised funds and other charitable vehicles.
There will likely be an even stronger push for greater flexibility with QCDs in future legislation, in light of the fact that so few taxpayers are now itemizing their deductions.