Estate Planning: How to Save Taxes with Qualified Charitable IRA Rollovers

By: Rachel Drude-Tomori, Esq., LL.M.

The Tax Cuts and Jobs Act of 2017 increased the standard deduction in 2019 to $12,200.00 for individuals and to $24,400.00 for those married filing jointly. This means that less people will be itemizing and more people will be using the standard deduction. In fact, it’s estimated that 21 million taxpayers will stop taking the charitable deduction under the TCJA. How can taxpayers who will not be itemizing still take advantage of their charitable bequests?

The answer is through a “Qualified Charitable IRA Rollover,” which permits an individual over 70-1/2 to make up to $100,000.00 per year of charitable gifts directly from an IRA. By making a qualified charitable distribution (“QCD”) from an IRA, the individual will not have to report the IRA distribution as taxable income, although the individual will not be able to claim an itemized charitable income tax deduction for the gift. In other words: reduce your taxable income by converting all or a portion of your taxable Required Minimum Distributions (“RMDs”) to non-taxable QCDs to fulfill your charitable pledges and gifts to save federal income tax.

Given the increased standard deduction under the TCJA, most taxpayers are better off reducing their gross taxable income vs. claiming an itemized deduction. Consider the following example of how a Qualified Charitable IRA Rollover can reduce your income taxes:

  • In 2019, Susan and Russell, a retired couple in their mid-70s, had taxable income of $200,000.00, of which $40,000.00 came from RMDs from their IRAs. They made $20,000.00 in charitable gifts from their post-tax income. They paid $8,000.00 in county property taxes, which is less than their combined standard deduction of $24,400.00, so they will not itemize and therefore cannot deduct the $20,000.00 in charitable gifts. In this scenario, they will pay approximately $30,500.00 in federal income tax.
  • Same facts, but in 2018, Susan and Russell learned about making gifts using a Qualified Charitable IRA Rollover from their Estate Planning Attorney, Rachel Drude-Tomori. Instead of using post-tax income to make their charitable gifts, they use $20,000.00 from Susan’s IRA to make the gifts, and they inform their CPA accordingly. Their taxable income will be reduced by the $20,000.00 QCD, and they will pay approximately $26,000.00 in federal income tax, meaning an estimated tax savings of $4,500.00!

The above example makes it clear that in almost every case, individuals age 70-1/2 and older should be utilizing QCDs for their annual charitable giving. What’s more, most IRA carriers now provide their clients with checkbooks linked directly to their IRAs. For more on creative Estate Planning using IRAs and retirement assets, please contact Rachel Drude-Tomori, Esq., LL.M. at rdrud@brdwlaw.com.