Donating with IRS Funds & Staying Compliant

I receive many queries from retirees who have moved money into traditional IRAs, 401(k)s and other tax-deferred retirement accounts. Retirees have to comply with long-standing rules that require them to make annual withdrawals from their accounts once they turn 72. (70 ½ was the required age for 2019 and earlier years.) 

The IRS characterizes their mandatory subtractions as required minimum distributions (RMDs). They want advice on whether it’s worthwhile for them to use some of their RMDs to make deductible donations that the IRS dubs qualified charitable distributions (QCDs).

After all, retirees reduce taxes when they itemize their charitable contributions on Form 1040’s Schedule A. I explain that the law allows them to make QCDs of up to $100,000 to one or more charities and to claim standard deductions that exceed their itemized deductions, as explained below.

While the RMD age increased to 72, the QCD age remains 70 ½. Another plus: the law permits a married person’s spouse 70 ½ or over to transfer another $100,000 to charities from his or her IRAs. 

Although QCDs count as part of RMDs, the IRS doesn’t tax QCDs. Thus, they do cut taxes on RMDs and are worth the bother.

Suppose a retiree retains Vanguard to handle her RMDs. Her 2022 RMD is going to be slightly north of $50,000; she and her husband are regular givers to Worthy Charity (WC) and other charities; and they want to send checks for $17,000 to their favorite philanthropies.

• What they shouldn’t do: Send their own checks.
• What they should do: Use her RMD to send QCDs of $17,000.
• Something else to do for 2022: If they’ve been itemizing, switch to claiming the standard deduction.

Recent legislation includes provisions that erase or curtail many itemized write-offs, such as placing a cap of $10,000 on deductions for state and local income, property and sales taxes. Also, it greatly expands the standard deduction amounts that are available to filers who don’t itemize.

Those amounts aren’t set in stone. They’re increased annually to reflect inflation. For 2022, they are $25,900 for married persons filing jointly, dropping to $12,950 for single persons and married persons filing separate returns.

For 2022, there are additional amounts for individuals who are older than 65 (a group that includes all RMD recipients), as well as for those who are legally blind: $1,400 for marrieds filing jointly or separately and $1,750 for single persons.

2022’s no-questions-asked standard deduction for the couple: $28,700 ($25,900 for both, plus $1,400 for her and $1,400 for him).

Why it pays for the couple to abandon itemizing for 2022: They are renters, have no deductions for mortgage interest or property taxes, and $10,000 is the most they can claim for state and local taxes. No deductions for medical expenses; their anticipated uninsured outlays for medical care are insufficient to surpass the nondeductible threshold of 7.5 percent of adjusted gross income. 

Their sole significant itemized deduction: That $17,000 they intend to give to WC and other charities.

Does their decision to skip Schedule A and use the standard deduction mean they forfeit any tax break for their donations? Not if they remind Vanguard to use her RMDs to make QCDs of $17,000.

Vanguard will send her checks for $17,000 payable to the charities (details matter; they can’t be payable to her) that she then forwards to WC and other charities. 

How things play out: her taxable RMD payout drops from about $50,000 to about $33,000; the couple claims a standard deduction of $28,700, an amount that exceeds their allowable Schedule A deductions of, at most, $27,000 ($17,000 and $10,000).

A reminder for donors who make QCDs: Get things done sooner, rather than later. Each December, donors inundate IRA administrators with last-minute requests for QCDs