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The little-known way seniors can deduct gifts to charities

If you are 70 ½ and older, you can use your IRA to make tax-advantaged charitable contributions, known as Qualified Charitable Distributions

Writing a donation check to a charitable organization. (iStock)

There’s lots of seasonal stuff happening these days: the arrival of fall, leaves changing color, the World Series.

It’s also the time of year when lots of us get bombarded by mailings from charities seeking contributions, which is why I call this “solicitation season.”

Solicitation season this year is lots more interesting than it was last year for those of us who are 72 and older and own individual retirement accounts. That’s because we get a tax break that’s far more valuable than it was in 2020.

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People aged 70½ and up who own IRAs can use them to make tax-advantaged charitable contributions. That’s true even if they take the standard deduction on their federal returns rather than itemizing deductions.

Using the standard deduction lets you deduct $300 ($600 for a couple filing jointly) of charitable deductions from your taxable income this year. That’s in addition to the standard deduction itself.

But you can shelter lots more in contributions by using qualified charitable distributions, known as QCDs. I’ve discussed them several times since I began using them myself in 2018, but they’re nowhere near as well-known as they should be. Solicitation season is a great time to start thinking about them.

Yes, I know that QCDs don’t apply to many of you. But someday they may, so it can’t hurt to start learning about them now. Besides, even if QCDs don’t currently apply to you, you might be able to help family members or friends who can use QCDs but don’t know about them.

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Here’s the deal. Once you turn 70½, you can make up to $100,000 a year of QCDs from your IRAs. The federally-taxable income generated by taking QCD money out of your IRA is offset by subtracting the QCD from your reported retirement income. (However, you may still have to pay state income tax on QCDs; it depends on where you live.)

The QCD benefit gets much more valuable once you hit 72. That’s because at 72, you have to take federally taxable “required minimum distributions” from your IRAs and your other retirement accounts, such as 401(k)s and 403(b)s.

These RMDs, as they’re called, are based on your age and on the life expectancies determined by the IRS. For example, if you had $100,000 in your retirement accounts as of Dec. 31 and will be 73 at the end of this year, your required minimum distribution is 1/24.7, or about $4,049. If you’re 83, it’s 1/16.3, or about $6,135. The older you get, the bigger the percentage you are obliged to withdraw.

Last year, Congress allowed people to waive their RMDs, which made QCDs less attractive than usual. But this year, RMDs are back in full swing. That’s why the QCD tax break is more valuable this year to people 72 and older than it was last year. And it’s why I deferred most of my 2020 contributions to the first week of this year, when I ordered lots of QCDs.

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To make a QCD, you need a check drawn on your IRA made out to the charity. (Not to your donor-advised fund if you have one — but to a charity). You can make out the check yourself if your IRA gives you check-writing power, or have your IRA administrator do it.

You get to deduct your QCDs by subtracting them from the retirement income number on Line 4a of your federal tax return and putting the net number on Line 4b. Make sure that you (or your tax preparer) put “QCD” on Line 4 to explain the disparity.

I’d love to give you statistics on how many people make QCDs these days. But there are no such numbers available because IRA administrators don’t keep track of QCDs. However, QCDs appear to be far more common than they were. That’s because some charities solicit them, some financial advisers and tax preparers (including mine) tell their clients about them, and firms including Vanguard (which I’m not shilling for, but where most of my retirement accounts happen to be) have greatly simplified the QCD process.

Thanks to the rising popularity of QCDs, it’s gotten a lot easier to make them — at least in my case. When I started making QCDs in 2018, I had to call Vanguard and tell a rep what charity to make out the check to, for how much, and how much (if anything) to withhold for state income tax purposes.

But for the past few years, I’ve been able to do that myself by filling out an online form and having Vanguard mail me a check made out to the charity. I then send the charity the check, and keep the printed form that accompanies the check.

It’s annoying and generates a ton of paper. But by doing things that way, I know that the QCD checks got sent to the right place and I have proof that I made those contributions.

If you’re required to take distributions from your retirement accounts and want to make charitable contributions, using QCDs rather than personal checks is like having money fall from the sky. So make sure to grab your bucket.

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