This is a big deal for those of us in our 70s and older who have stopped filing itemized federal tax returns as a result of Donald Trump’s 2017 tax law, which put a $10,000 cap on federal deductions for state and local taxes, including real estate taxes.
Before I get into details of how this tax break for older people works, a suggestion. Anyone who’s getting “required minimum distributions” from individual retirement accounts and is thinking about making year-end charitable contributions should consider using qualified charitable distributions rather than checks.
Yes, I know that what I’m talking about today doesn’t apply to many of you. But someday, it might. So it can’t hurt to begin thinking about this stuff now.
Sure, there’s a hassle involved in using QCDs, which we’ll call them from now on. But if you’re willing to fill out some forms and do some paperwork, you may be able to save thousands of dollars on your federal income tax (as my wife and I did last year) by making contributions with QCDs rather than checks.
Here’s how QCDs work. You add up your QCDs for the year, then subtract the total from the income number on line 4a (IRAs, pensions and annuities) of your federal tax return. You enter the 4a number minus QCDs on line 4b, which reduces your adjusted gross income.
That’s the functional equivalent of deducting the QCDs.
In addition, you can still take the standard deduction if that makes more sense for you than itemizing deductions.
What’s more, reducing your adjusted gross income by using QCDs might reduce your future Medicare B premiums because they’re based on your adjusted gross income.
Some of my friends use checks drawn on their retirement accounts to make all their QCDs. I can’t do that because I take my QCDs from Vanguard, which holds my primary retirement accounts and won’t let me write a QCD check for less than $250.
So I fill out an online form for each QCD I take, telling Vanguard the amount, the charity I’m contributing to, and whether I want to set aside state withholding tax because charitable contributions aren’t deductible on my New Jersey state tax return.
Then in a few days, the check, made out to the charity but addressed to me, shows up at my house, the Postal Service willing, and I send it where it belongs.
Okay. If you’re going the QCD route, here are some things you should watch out for:
First, this strategy works only for people who are taking required (and taxable) distributions from IRAs. You can’t use QCDs to offset income from pensions or 401(k)s.
Second, you can use QCDs only for 501(c)(3) charities.
Third, the 1099-R year-end retirement-income form that you get from your IRA provider shows the income that you’ve received from the account but doesn’t include any QCDs you may have made.
Fourth, make sure that you subtract (or your tax preparer subtracts) the QCDs before you enter the retirement-income number on line 4b of your tax return.
Fifth, to avoid possible IRS problems, you or your tax preparer should note on your return that you’re using QCDs.
And finally, finally, finally … please, remember that I’m a business journalist who sometimes writes about taxes. I’m not a tax professional. I’m offering general advice that works for me but might not be appropriate for you.
And on that note: Have a happy contribution-making season, whatever form your contributions take. And may you grow older gracefully, not grumpily.