With the increase in the standard deduction and the decrease in available itemized deductions ($10,000 limitation on state and local taxes and miscellaneous itemized deductions no longer available), many taxpayers are choosing to take the standard deduction. Choosing the standard deduction means taxpayers will not receive a deduction for charitable contributions. However, for taxpayers aged over 70 ½ and receiving a required minimum distribution (RMD) from their IRA, there is an alternative that is even more tax beneficial than taking an itemized deduction. These taxpayers can reduce their RMD by the amount of charitable contributions made from their IRA. This is known as a qualified charitable distribution (QCD). A QCD is particularly beneficial because it not only reduces the amount of tax paid regarding the RMD, but the deduction reduces adjusted gross income rather than just taxable income if the amount were to be claimed as an itemized deduction.
But there is a “catch” for many IRA beneficiaries. Unlike an itemized charitable contribution that is deductible in the year the charity receives the check, where the taxpayer has checks that they can use to make a QCD, the deduction from the RMD is only available for the year the charity cashes the check. Many taxpayers make their charitable contributions at the end of the calendar year and many charities will not be depositing the checks until the following year. This contrasts with the situation where the taxpayer authorizes the IRA custodian to send a charitable contribution check directly to the charity, in which case the deduction from the RMD is available on the date the custodian mails the check.
Taxpayers also need to ascertain the annual date when the RMDs are distributed by contacting their IRA custodian or checking their deposit records. Many, if not most, IRA custodians distribute the RMDs at a date during the year, rather than at calendar year end. So, for instance, if the distribution date for the taxpayer’s RMD is June 30, 2019, and the taxpayer arranges with the IRA custodian to make charitable contributions in December 2019, the 2019 RMD has already been transmitted and therefore the contributions cannot reduce the 2019 RMD. Furthermore, because the charitable contributions were made in 2019, it is unlikely that they would qualify for a reduction in the 2020 RMD. In such a circumstance, the contribution amounts will come out of the taxpayer’s IRA and will not be taxable to the taxpayer, but will not reduce the taxable amount of the RMD.