Unintended consequences happen when the results of an action differ from the expected outcome.
When the Tax Cuts and Jobs Act (TCJA) was passed in 2017, some were concerned that the sweeping legislation might have several unintended consequences.
And it did. One of those unforeseen outcomes was the uptick in individuals turning to Qualified Charitable Distributions (QCDs) when taking distributions from traditional IRAs. Here’s what happened that sparked the renewed interest in QCDs.
What’s a QCD?
Once you turn 73, you must start taking annual required minimum distributions from your Traditional IRA. Those distributions are taxable when received by the IRA owner. But with a QCD, these distributions become tax free as long as they are paid directly from the IRA to an eligible charitable organization.1
In other words, the taxpayer never sees the income, so they don’t report it on their tax return.
What changed in 2017?
The TCJA nearly doubled the standard deduction you can use when filing your taxes, and it put some restrictions on itemized deductions. For 2024, the standard deduction is $29,200 for a married couple filing jointly.
At the time, it was widely anticipated that the larger standard deduction would reduce the number of taxpayers choosing to itemize their deductions. However, in true unintended consequences fashion, the actual numbers were higher than the most optimistic estimates. Almost 76% of taxpayers who earned between $100,000 and $200,000 itemized their deductions in 2017. A year later, after the TCJA took effect, that number dropped to 32%.3
“According to Webster, wisdom allows us to apply information and knowledge to effectively and efficiently achieve the desired end result. Therefore it behooves each of us to see wisdom diligently,” wrote Mick Owens, who wrote the popular book, Diamond of Life: The Five P’s of Success and Significance.
How does a QCD work?
A QCD allows individuals who are 70 1⁄2 years old or older to donate up to $105,000 to one or more charities directly from a taxable IRA instead of taking their RMDs. As a result, donors may be able to manage their tax position and avoid being pushed into higher income tax brackets that prevent phaseouts of other tax deductions.4
Pro tip: The IRS explains that, for a married couple, if both spouses are age 70½ or over when the distributions are made and both have IRAs, each spouse can exclude up to $105,000 for a total of up to $210,000 per year.5
Remember: After reaching age 73, you must begin taking the required minimum distributions from a traditional individual retirement account (IRA) in most circumstances. Withdrawals are taxed as ordinary income. If a withdrawal is made before age 59½, a 10% federal income tax penalty may apply.
Steps to consider.
If you like the idea of supporting a charitable organization with your RMD, please let us know. We can walk you through the pros and cons and help you evaluate what decision might be best for you. If your RMD is income that you may–or may not–need, exploring a QCD could make sense.
One of the first steps would be to connect with your tax professional to explain what you are considering. Or, if you would like, we can also loop in our tax planning department and see what guidance they can provide.
- IRS.gov, November 16, 2023
- Schwab.com, 2024
- SmartAsset.com, March 31, 2021. (Most recent statistics available.)
- FideltyCharitable.org, 2024
Fidelity.com, 2024
