I’ll show you how it works:

Your income is $65,000* before any deductions. In the past, your itemized deductions came up to $20,000, and your personal exemptions were $8,100 so your taxable income was $36,900. Your itemized deductions included $10,000 that you send to various charities through the year, and the rest is real estate tax and medical expenses. Your annual RMD from your IRA is $5,000. (*All of these figures are completely made up, nice round figures to help with the example.)

In 2018, since your itemized deductions are less than the standard deduction, you’d just use the standard deduction. So your $65,000 income minus $26,600 equals $38,400 (remember there are no personal exemptions in 2018). That’s a higher taxable income than you had in 2017, because of the changes to the law. The lowered tax brackets would mean a lower overall tax bill, but you’re paying tax on a higher amount of income – and you didn’t change anything!

Now, if you used a QCD for your RMD of $5,000, your taxes would look a bit different. The QCD amount is not included in your income, so the income figure is reduced off the start to $60,000. Then then new standard deduction of $26,600 is subtracted, for a taxable income of $33,400. That’s $3,500 less than last year, and you didn’t have to itemize. How about that?

Dad: Well, that’s pretty amazing. So I only have to use this QCD and I can reduce my taxable income by $5,000?

Me: It gets better. Since you make a total of $10,000 in charitable contributions every year, you could use the QCD to distribute that full $10,000 to your chosen charities, and reduce your taxable income by that full amount.

If you send the full $10,000 to your chosen charities using QCD, your overall taxable income would be reduced even further, down to $28,400. That works out to a $1,200 reduction in taxes!

Dad: Well – I bet it’s really a hassle to do these QCDs. I don’t like hassles. (True statement. He doesn’t like hassles.)

Me: Not at all. You already have to notify your IRA custodian annually to have your RMD withdrawn. All you need to do is tell them to send the specified amounts to your chosen charities as Qualified Charitable Distributions. Then they take care of the rest of it. You’ll need to make sure you keep record of the QCD so that you can properly prepare your taxes – currently the 1099R forms don’t reflect whether your distribution was a QCD – so this is really important!

And so it went (fictitiously).

So if you fit into the parameters outlined above, you too could use this method to have more tax-efficient charitable giving. If you need more details, just reach out to me.

Astute reader BB pointed out that you must actually be 70½ years old to use the QCD. This could represent a challenge in timing if your 70½ age occurs very late in the year. BB also pointed out a problem with the earlier version of this article in that currently, Form 1099R does not have a provision or code to indicate that the distribution (or part of it) was a QCD. You’ll need to maintain your own records and make this notation in your tax return. 

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