I’M NOT ONE TO DIVE into the mysteries of the tax code in an effort to avoid paying Uncle Sam. But I’ve lately stumbled onto something that many others are already well-versed in and which has been around since 2006: qualified charitable distributions.
If I make a contribution from my traditional IRA directly to a charity, the withdrawal is excluded from the taxable income reported by my wife and me and, indeed, it counts toward my required minimum distribution. That means the donation is effectively tax-deductible, even though we no longer itemize.
The Tax Cuts and Jobs Act of 2017 eliminated personal exemptions but doubled the standard deduction—at least through 2025. For many seniors like us, the standard deduction is now higher than we can reach by itemizing.
We pay no mortgage interest, and our property and state tax deductions are capped at $10,000. If my out-of-pocket medical costs ever exceed 7.5% of our adjusted gross income—the threshold to deduct them—I probably won’t be around to know it.
So what’s left to deduct? Charitable donations. Problem is, our donations won’t exceed 2023’s standard deduction of $27,700 for a married couple. We donate to St. Jude Children’s Research Hospital, our church, a local food pantry, a volunteer fire department, the Colonial Williamsburg Foundation and a few other charities.
It’s not a lot, but it comes to several thousand dollars a year. Americans are a generous people. We donated $485 billion to charities in 2021, with $327 billion of that coming from individuals, according to the National Philanthropic Trust.
We would give this money away, regardless of the tax code. But my recent discovery allows me to make our donations tax-free. In case you’re wondering, you can’t do this with a 401(k).
There are requirements, but we meet them handily. My contributions won’t exceed the $100,000-a-year limit, I’m certainly over the required age of 70½ and the charities we support are qualified. On top of all that, the whole process is made easy for me.
I just go to my Fidelity Investments online account, pick a charity and specify the amount I want to contribute. Fidelity deducts that amount from my IRA and sends me a check payable to the charity, which I then mail. I can do this multiple times throughout the year.
I’ll have to take around $50,000 in required minimum distributions this year. My charitable contributions count toward this sum. Say I donate $10,000 to different charities. In effect, $40,000 of my required distributions will be taxable. The $10,000 I’ve given to charity will leave my IRA tax-free. Seems like a good deal to me.
First published on HumbleDollar.com January 25, 2023
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I and my wife have used the QCD in our RMDs and it is easy and as you say it is a good way to catch a tax break. Good read for those who may not know it is available.