by Rick Adkins, CFP®

For several years, you’ve been able to donate up to $100,000 from your IRA each year directly to charities and satisfy your Required Minimum Distribution (RMD). This provision is known as a Qualified Charitable Deduction (QCD). Initially, the law was temporary and we didn’t know from year-to-year if it would be available. It was finally made permanent, allowing for better planning.

This provision was primarily used by individuals with large IRA balances which caused very large RMDs. Times have changed.

The new tax law has made this provision more important to most retired taxpayers. With the increase of the Standard Deduction to $24,000 for couples and $12,000 for individuals, many taxpayers will no longer benefit from itemizing, when you consider 1.) the deduction for state and local taxes is now limited to a maximum of $10,000 and 2.) the fact that most retirees have little or no mortgage interest. This makes Charitable Contributions no longer deductible for most taxpayers, As a result, they find themselves paying income tax on their IRA distributions but aren’t able to deduct their charitable contributions.

Here’s where the QCD can help. Let’s say you are taking $4,000 per month from your IRA and you are donating $500 per month to a charity. With your Social Security payments and other income, you are probably in a 22% federal and 6% state tax bracket. That means you are paying about $1,120 per month in taxes on your IRA Distributions. So you’re netting $2,880 per month. When you subtract your charitable gifts, you really only have $2,380.

Instead, if you send the $500 directly to charities, you will pay taxes of approximately $980 on your IRA distribution, leaving you with $2,520. That’s an increase of $140 per month or $1,680 per year. That’s a nice addition to your discretionary spending and it cost you nothing!

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