Are you one of the 87% of Americans who are not able to deduct your charitable contributions on your tax return?(1) When I’ve asked this question to most of our clients, their response usually is “No – I gave my charitable contributions to my accountant.” However, they’ve failed to actually review their tax return or discuss with their accountant whether they are able to deduct their charitable contributions.
I’ll try to keep this brief to not bore you with tax details, but this goes back to the Tax Cuts and Jobs Act of 2017. This Act increased the standard deduction from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for married couples. For example, if a married couple has $18,000 in itemized deductions, they would have itemized in 2017. In 2018-2019, they save more in taxes by taking the standard deduction but they aren’t able to deduct their charitable contributions. That’s where Qualified Charitable Distributions come in (QCD).
What Is a QCD?
A qualified charitable distribution is allowed for those who are over age 70 1/2. Rather than withdrawing funds from your retirement account and placing the proceeds in your bank account and then sending a donation to your charity, you withdraw funds and send them DIRECTLY to the charity you want to support. When this is done correctly, the amount you withdraw never shows up on your tax and saves you tax dollars.
Most people’s combined tax bracket between Federal and State taxes is 15-40%. For a $10,000 charitable contribution, this could save you $1,500-4,000 in taxes! The maximum QCD you can do annually is $100,000.
Should I Do a QCD if I Itemize My Tax Deductions?
The short answer is yes! By doing a QCD, your income is lower which leads to a lower Adjusted Gross Income (AGI) on your tax return. Your AGI is used to determine how much of your Social Security benefit is taxable and what your Medicare premiums are. A QCD could keep you in a lower bracket and save you thousands more in taxes and additional Medicare premiums.
Please click on this link to access a flowchart that walks you through all of the questions you should ask to ensure you’re eligible to make a QCD.