What You Need to Know in 2018 about Qualified Charitable Distributions

Brett T. Siegfried

Brett Siegfried AIF®, CLU®, Krilogy Financial® Advisor

Matt Mercer

Matt Mercer, CPA, MBA, Krilogy® Tax Services

We at Krilogy work with clients through all phases of their retirement planning, investment strategies, and tax strategies related to executing their wealth management strategies. A key milestone in this journey occurs when a client reaches 70-1/2 years old, the age at which he or she must begin taking Required Minimum Distributions (RMD) from their retirement accounts. Yet in some cases, the individual may not want or need this income. The good news is that there is a way to somewhat avoid this requirement while enjoying many tax benefits as a result – the Qualified Charitable Distribution (QCD).

Qualified Charitable Distributions

Many Krilogy clients are community-minded, and include charitable giving as a component of their overall wealth management strategy. The Qualified Charitable Distribution allows them a tool to fulfill on this commitment to giving through their Required Minimum Distribution. Here’s how it works:

  • The situation: Let’s assume that a client’s required minimum distribution is $10,000. Yet in their specific financial situation, they don’t need the money to live and they’d rather not have an additional $10,000 in taxable income to report. The client has a history of charitable giving, and plans to donate a total of $4,000 to charities of choice in the current tax year.
  • The tool: Enter the Qualified Charitable Distribution. The client may donate that $4,000 from his or her retirement account as part of their RMD. This $4,000 is never recognized as income because it passes directly from the client’s account to the recognized charity of choice.
  • The result: The client receives the remainder of the RMD, $6,000, and reports this amount as income – a full $4,000 less than had he or she taken the total RMD of $10,000.

The Importance of the QCD in Today’s Tax Environment

The Tax Cuts and Jobs Act of 2017 created many changes in tax law. Most notably for this discussion, it substantially increased the standard deduction to $12,000 for individuals, $18,000 for heads of household, and $24,000 for joint filers. It’s been reported that 93% of taxpayers will take the standard deduction and not realize the full tax benefit from their donation. The QCD can change this:

  • The QCD is an “above-the-line” deduction, which lowers the Adjusted Gross Income (AGI) being reported on the tax return. Regular charitable deductions are “below-the-line” and an individual must surpass the standard deduction to even receive the tax benefit of their donation. This is not the case with a QCD, which lowers the taxable income recognized from the RMD.
  • A lower AGI means that the client can potentially claim more medical expenses, because deductible medical expenses must exceed 7.5% of AGI. This minimum threshold is now more accessible.
  • A lower AGI could potentially result in lower Medicare Premiums, can help the individual avoid paying tax on social security benefits, and may put the individual in a lower tax bracket.
  • The individual may also be able to get out of phaseouts or limitations from other deductions or credit because of his or her lower AGI.

We believe that Qualified Charitable Distributions will only continue to increase in popularity as a wealth management, strategic tax planning and charitable giving tool. The Krilogy team of advisors and tax specialists can help you devise a plan to leverage a QCD for your specific situation. Please reach out with any questions you may have about this powerful planning tool.

Important Disclosures:

Investment Advisory Services offered through Krilogy Financial®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy Financial’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements.

All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services, nor is it to be construed as individualized advice or recommendations suitable for the reader.

Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results.

Krilogy Financial®, its employees and financial advisors cannot provide tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advices. You should consult your attorney or qualified tax advisor regarding your situation. Krilogy® Tax Services, LLC is a separate but affiliated company to Krilogy Financial® and provides separate tax services for a fee. Services and products offered through Krilogy Financial® are not insured and may lose value. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.