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IRA Distributions to Charity are Often Not a Good Idea for Senior Citizens

December 10, 2018

Bernie Kent



This article by Bernie Kent was originally published on

In December 2017, I wrote a Forbes blog, entitled Upper-Income Taxpayers Can Benefit From the Standard Deduction: What You Need to do Now, in which I described the new tax planning opportunities for upper income taxpayers due to the larger standard deduction beginning in 2018.

Much of the planning involves charitable contributions. One small aspect of the article stated, “Taxpayers who are over 70 ½ years old have an additional way to receive a tax benefit for their charitable contributions while still claiming the standard deduction. They can contribute up to $100,000 from their IRA directly to charities (not to donor-advised funds) without including the income or deduction in their tax calculation.”

The Wall Street Journal recently published a thorough article by Laura Saunders, entitled The Secret Way Seniors Can Keep Deducting Gifts to Charity. In addition to explaining the ins and outs of the Qualified Charitable Distributions (QCDs) from IRAs for taxpayers over the age of 70 ½, she quoted some leading experts in the field who discussed some of the advantages of making charitable contributions through QCDs. These include:

  • the potential to get the tax benefit of charitable deductions even when taking the standard deduction,
  • lowering Adjusted Gross Income which could result in less or no 3.8% tax on net investment income, and/or
  • lower Medicare premiums.

In addition to the potential benefits of QCDs mentioned in Ms. Saunder’s article, there are at least two other potential benefits of QCDs for some taxpayers. Seniors who receive a tax benefit from their medical expenses in excess of 7.5% of AGI in 2018 (10% in 2019) will receive a larger deduction by making QCDs than by contributing their non-IRA funds to charity. Also, there may be additional tax savings from QCDs for taxpayers who live in a state that imposes a state income tax. Many states tax IRA distributions and limit or disallow charitable contribution deductions. In those states there is the likelihood of saving the state income tax on what would have been a taxable IRA distribution.

So, with these many benefits of QCDs, should charitable seniors take advantage of this opportunity? In my Forbes blog post four years ago, entitled Should You Make a Charitable Contribution From Your IRA?, I explained:

“There is only one reason NOT to take advantage of the [QCD] exclusion for IRA charitable contribution if you otherwise qualify and want to make a direct gift to charity. That would be where you could save even more tax on your charitable contribution by making a gift of appreciated long-term capital gains property.”

In my experience, wealthy taxpayers over age 70 ½ who make $100,000 charitable contributions are usually better off making gifts of appreciated long-term capital gain property than they are making QCDs. Long-term capital gains rates now range from 0% to 20%. Long-term capital gains may be subjected to the 3.8% tax on net investment income as well as state income taxes, which can reach 13%. It is impossible to create general rules about the tax impact of capital gains.

Taxpayers who are in the highest marginal bracket for their long-term capital gains (often 28% to 37%, including state income tax) may have highly appreciated securities that they have held for more than a year. The tax benefit from giving away $100,000 of stock that has doubled would be a tax savings of $14,000 to $18,500 in capital gains tax, in addition to the tax benefit from the charitable contribution deduction. This usually dwarfs the tax savings from all the tax benefits accruing to QCDs. These taxpayers may hold stocks that have doubled several times so that the capital gains tax savings can be approach $35,000 on a $100,000 gift. Of course, that capital gain can be avoided if the stock is held until death.

The Wall Street Journal article gives an example of a couple who “doesn’t want to give appreciated stocks, because that would deprive their heirs of a tax break, called the step up, that eliminates capital-gains on some assets held at death.” While holding stock until death may result in tax savings, it may also result in greater risk of investment loss and lower after-tax investment return. It is shortsighted to look at only at tax savings and ignore investment return. Holding stocks until death may be a viable investment plan for someone expected to die within months. But for most seniors over 70 ½, holding until death could mean not selling stocks for five to twenty-five years. There is the potential for forced disposition if the company is sold for cash. More importantly, prudent investment management includes reducing the holdings of stocks that are disproportionate to size of the portfolio. With active money managers, they will at some point want to dispose of stock that has reached its full potential. Making charitable contributions of stocks is a more efficient way to manage a portfolio than selling and paying the tax or holding until death.

My conclusion on this issue is the same as it was four years ago:

“The IRA charitable contribution provides a tax benefit for many taxpayers over age 70 ½. It should be used by most charitably-minded seniors unless they could receive a greater tax benefit from a gift of substantially appreciated long-term capital gains property. Each taxpayer must look at their personal tax situation and compare the benefit of the two approaches to charitable giving.”