Qualified Charitable Distributions Reduce Tax Bills

CPAs are the frontline in mitigating the impacts of Required Minimum Distributions (RMDs)

CPAs have the opportunity to be proactive in helping their clients take advantage of the tax break for charitable IRA rollovers, technically known as QCDs (qualified charitable distributions). After my IRA update session at the AICPA ENGAGE conference, this topic generated the most questions of everything I discussed. It’s an easy provision to follow, and it’s even easier to know exactly which clients qualify.

The topic of QCDs is an important one for CPAs, because it’s an opportunity to provide real value to clients who are unaware of the provision. One of the most heavily emphasized messages from the ENGAGE conference was how to offer competitive services in the future. The answer always came down to relationships based on knowledge resulting in higher value services. QCDs fit perfectly into this.

QCD Basics

QCDs only apply to IRA owners and beneficiaries (it applies to inherited IRAs as well) who are 70½ years old or older. That’s it. The provision doesn’t apply to distributions from company plans like 401(k)s or 403(b)s.

Many clients make charitable contributions. If your client has an IRA (or inherited IRA), is 70½ years old or older and subject to required minimum distributions (RMDs), they can make their donations directly from their IRA to the charity. It must be a direct transfer to the charity, but a check from the IRA made out to the charity will also qualify. Your clients can make up to $100,000 in annual IRA donations, which likely covers most of them.

What’s the benefit? They save on taxes. How? The transfer from the IRA to the charity is excluded from income and also satisfies the annual IRA RMD, up to the amount transferred. There is no charitable deduction because that would be double-dipping, but the exclusion from income lowers AGI. That can trigger tax savings in many other income-based areas, such as itemized deductions, personal exemptions and even cutting Medicare premiums and the tax on Social Security benefits.

This isn’t about giving more money to charity to get a better tax deduction. This is about paying less tax when giving the same amount to charity. Any client would opt for that, but they are generally not told about it.

As a CPA, you can add value with proactive advice. You should be able to create a list of qualified clients from your tax preparation files. Contact those clients now and help them arrange their charitable giving through their IRA. Then next year at tax time, show them how much they saved in taxes. That’s tangible value. The next thing you know, they’ll be telling their friends about this… and you!

The QCD provision was in flux for years after its 2006 inception, which might be one reason it isn’t well-understood. It was repealed and renewed several times, creating uncertainly about its availability. It was only at the end of 2015 that it became a permanent provision of the tax law. Now that it’s permanent, you should use it with all of your qualified clients as soon as possible, rather than telling them about it next year at tax time (when it will be too late to implement the QCD for that year). No one wants to hear what they should have done last year. They need you to show them what to do ahead of time; planning is where you show value.

Here are a few more points on QCDs:

If your client takes the standard deduction but still gives to charity, then the QCD in effect adds a charitable deduction to the standard deduction, by having the donation excluded from income.

QCDs never apply to company plans – only to IRAs including inactive SEP and SIMPLE IRAs.

Don’t use QCDs for Roth IRAs. Roth IRAs have no RMDs during lifetime and only taxable funds can be used for QCDs. Most Roth distributions will be tax-free and there’s no tax benefit to giving already taxed funds.

Split interest gifts, charitable gift annuities, donor advised funds and private grant making foundations do not qualify. The QCD provision is basically only for a direct gift from the IRA to a charity, with no conduit in between.

There can be no quid pro quo, meaning no benefit back to the client. If the client gives to the charity through the IRA but receives even a small gift in return (e.g. tickets to an event or concert, or a small token such as a tote bag) the QCD is disqualified.

For tax reporting: Currently there is no coding on the 1099-R form for a QCD. You have to ask your clients about this when preparing their taxes.

If you are proactive and add value with QCD planning, you’ll see immediate results in appreciative clients.

Use Broadridge Advisor’s ready-to-go client communication pieces on QCD planning to talk further with your clients about this concept (complimentary to Personal Financial Planning Section members).

Ed Slott, CPA, IRA and retirement expert. Ed has been named “The Best” source for IRA advice by the Wall Street Journal. He is a nationally recognized professional speaker and has been featured in national public television specials. Ed created The IRA Leadership Program and Ed Slott’s Elite IRA Advisor Group. For more information, visit www.irahelp.com or email Ed at info@irahelp.com.

RMD courtesy of Shutterstock.

Qualified Charitable Distributions Reduce Tax Bills

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