What, another financial acronym? Yes, in late 2015, Congress passed the PATH (Protecting Americans from Tax Hikes) Act, which made the QCD permanent in early 2016. QCD stands for Qualified Charitable Distribution. This type of charitable gift is made directly from an IRA and isn’t included in taxable income. The QCD was introduced in 2006, but fell into the on-again, off-again bucket of acceptable tax strategies until the end of 2015.
Any individual over the age of 70 ½, who receives an annual RMD (required minimum distribution) from his/her IRA, is eligible to take advantage of a QCD. Now that the strategy is permanent, it’s worth a discussion if you’re already gifting to charity each year, over 70 ½, and the owner of an IRA.
As everyone knows, a gift to charity is tax deductible. So how is the QCD different and potentially more tax beneficial?
The amount of the QCD is excluded from income, which effectively lowers AGI (adjusted gross income) by that same amount. AGI is the threshold by which most itemized deductions are measured to determine if allowable or not. For example, unreimbursed medical and dental expenses are only deductible to the extent that they exceed 10% of AGI. Therefore a lower AGI may translate into an allowable or larger medical/dental itemized deduction.
Another benefit of the QCD is the possibility to reduce Medicare Part B premiums. This year, the standard premium for Medicare Part B is $134/month if you’re a single filer and your 2015 AGI was below $85,000 or married filing jointly and your 2015 AGI was below $170,000. To the extent your AGI was higher that these amounts on your 2015 return, your Medicare Part B premiums this year also increased. Currently, four AGI brackets determine the Part B premium amount that’s deducted from an individual’s monthly Social Security check.
|MAGI* Limits for Medicare Part B Premiums|
|Single Tax Filer:||Married Filing Jointly:|
|2015 MAGI:||2017 monthly premium:||2015 MAGI:||2017 monthly premium:|
|Less than $85,000||$134.00||Less than $170,001||$134.00|
|$85,001 to $107,000||$187.50||$170,001 to $214,000||$187.50|
|$107,001 to $160,000||$267.90||$214,001 to $320,000||$267.90|
|$160,001 to $214,000||$348.30||$320,001 to $428,000||$348.30|
|Greater than $214,000||$428.60||Greater than $428,000||$428.60|
*MAGI (modified adjusted gross income) = AGI + tax exempt interest
The maximum QCD amount is $100k per individual (or $200k per couple as long as $100k is given from each taxpayer’s IRA). So, in a year where one spouse gifts the maximum QCD, AGI will be reduced by $100k and the bracket which determines Medicare Part B premiums will also be lowered by $100k. For example, Billy and Betty’s 2015 AGI was $245,000 which translates to 2017 Part B premiums of $6,429.60/year. This year, Billy and Betty gifted $100k through a QCD to their alma mater to establish a named scholarship fund. The QCD lowered their AGI to $145k (assuming all other items remain constant), which reduced their bracket for determining Medicare Part B premiums. The new lower premium of $3,213/year (premium reduction of 50%) will take effect in 2019. Remember the premium change does not happen until the year after the tax return effecting the change is filed.
One further point to make – a QCD must be given to a public charity. A private foundation or donor advised fund does not qualify.
Parsec’s client service team processes QCDs on a regular basis for our clients. Here’s an outline of the simple steps to follow:
- Call your Financial Advisor
- Complete an IRA distribution form from your custodian – ensure that the gift is coded as a QCD.
- No tax withholding selected – the distribution is non-taxable.
- Check must be payable to the charity, not to the IRA owner. The check may be mailed directly to the charity or to the individual to hand to the charity.
- Make sure that your accountant is aware of the QCD.
Please contact your advisor with any questions.
Betsy Cunagin, CFP®
Senior Financial Advisor