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How to Avoid Losing Your Charitable Donation Deduction

The 2017 Tax Reform basically doubled the standard deduction for taxpayers, which is currently $12,550 for single filers and $25,100 for joint filers ($14,250 and $26,450 for single and married age 65+, respectively). Also, state and local income tax, sales tax and property tax deductions (commonly known as SALT) are now limited to a combined $10,000 limit. Therefore, many folks will no longer benefit from itemizing their deductions. However, if you answer “Yes” to the following three simple questions, you may be able to get a full “above the line” charitable deduction in addition to the standard deduction, and you can also satisfy all or part of your Required Minimum Distribution (RMD):

  1. Are you 72 years or older?
  2. Do you have an IRA?
  3. Do you make cash contributions to charities?

If you answered yes to all three questions, you still have time in 2021 to make charitable contributions from your IRA(s). Here’s how a Qualified Charitable Distribution (QCD) works:

  • Instruct your IRA custodian to send distributions directly to your charity. This is often accomplished using the custodian’s regular IRA distribution form and indicating the payee as the charity. Be sure to contact your charity for accurate name and mailing instructions. You should also follow up to be sure the charity received your check and credited you with the contribution.  ometimes the IRA custodian does not clearly indicate your name on the check or corresponding documents. Another idea is to request a checkbook from your IRA custodian and write a check directly to the charity. Most brokerage accounts can provide them. That way you can contribute to your favorite charities, just like you were before, but using your IRA checkbook, instead.
  • Your IRA custodian will still issue the same 1099R as they would with any regular IRA distribution you take. It’s important that you or your tax preparer document your QCD correctly so that the portion of your distribution that was sent to a charity does not get included in your AGI and reported as taxable income. You or your tax preparer simply indicate the total amount of distributions on form1040, line 4a and then fill in line 4b with the portion of the distribution, if any, you did not send directly to the charity. Be sure to also write QCD next to Line 4b. Example: say your 2021 RMD is $35,000 and you send $10,000 directly to your charity. For Line 4a enter $35,000 and for Line 4b enter $25,000 (taxable portion). Be sure to keep all transaction records. Note: QCDs cannot be done with 401k accounts! However, there are work-arounds to that.

Also keep in mind that any deductible IRA contributions made during the tax year will offset the QCD. The SECURE Act eliminated the age limit for traditional IRA contributions, which can potentially throw a wrench into a QCD strategy.

QCDs first came on the scene back in 2006 but are becoming more popular now due to the doubling of the standard deduction and SALT deduction limits. The QCD annual limit is $100,000 per person ($200,000 for married couples, filing jointly).