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Has your advisor mentioned Qualified Charitable Distributions?


Retired man giving gift from his IRA and retirement


Here's one of my favorite ways to minimize taxes on Required Minimum Distributions


Did you know that you can give to charity and reduce your Required minimum distribution, without itemizing your deductions?


It’s called a Qualified Charitable Distribution and it’s one of my favorite strategies.


The short explanation is that once you turn 70.5, you can donate to a charity directly from your IRA. The benefit here is that the donation counts towards your RMD (if you have one), but it never actually counts as taxable income. You don’t have to itemize your deductions because it never counted as income in the first place.


This is valuable because most retirees can’t itemize their deductions. I see many retirees who give to charity, but get zero tax benefit. Using a QCD means you don’t have to worry about itemizing and you can still get the benefit.


-Jeb



 

What’s a QCD? What are the benefits?


The Qualified Charitable Distribution (QCD) allows people over 70.5 to give up to $100,000 per year directly to charity. The amount of the QCD counts towards your yearly Required Minimum Distribution (RMD), lowering the required distribution dollar for dollar, potentially to zero.


Here’s the situation I see pretty often. A client isn’t ready to begin taking distributions from their IRA at 72 / 73. Maybe they have a pension or other income that, along with Social Security, covers their spending needs. They live comfortably without drawing from their IRAs and paying the associated income taxes. They probably have a couple charities they support regularly, maybe they tithe at their church.


I have several clients like this and many of them use QCD’s as their main form of giving.


With a bit of planning, they can continue their donations, while keeping from taking a tax hit from an RMD that they don’t need. It’s often a win-win situation for everyone.


In the past, it occasionally made sense to take the RMD and then write a check to charity. The donation would count towards itemizing tax deductions. While this is still possible, most retirees are finding it harder to find enough deductions to make itemizing deductions worthwhile. With the higher standard deduction, now $27,300 for couples over the age of 65, most folks just don’t have that much to deduct.


When clients do elect to itemize, they often find that donations don’t give them a dollar for dollar deduction because slippage. Slippage is just the difference between the deduction you expect and the deduction you get. This slippage comes from potential paying more in

Social Security tax, the phaseout of itemized deductions, the addition of a 3.8% Medicare surtax or increases in cost for Medicare Parts B and D through IRMAA.


Giving using a QCD bypasses all these issues and keeps the amount of the distribution from ever showing up as income. There is no issue with slippage when using a QCD.


Let’s look at an example.


Bill and Betty are 72 years old. Between the two of them, they have $45,000 of Social Security benefits, $20,000 of portfolio income, $40,000 from Andrew’s military pension, and Andrew faces a $29,296 RMD from his $750,000 IRA. In addition, the couple wish to make a significant bequest to their alma mater this year and have pledged a $29,296 donation (to offset their looming RMD obligation).


If the couple gives the $29,296 QCD directly to the charity, the couple’s AGI is $20,000 (portfolio income) + $38,250 of taxable Social Security benefits + $40,000 pension = $98,250. Their itemized deductions include paying $3,500 in state income taxes, $2,000 in property taxes, and $8,000 in investment management fees (which are limited to $7,035 in excess of the 2%-of-AGI floor). Thus, their total deductions are $12,535, less than the $27,300 standard deduction. With the standard deduction, their taxable income is $70,950. Based on the 2018 married filing jointly tax tables, this puts the couple in the 12% tax bracket, with a total tax liability of $8,513.


If the couple instead decided to take the RMD and then donate the same $29,296 to charity, their situation would look like this:


The couple’s AGI is $20,000 (portfolio income) + $38,250 of taxable Social Security benefits + $40,000 pension + $29,296 (RMD) = $127,546. Their itemized deductions include paying $3,500 in state income taxes, $2,000 in property taxes, and $8,000 in investment management fees (which are limited to $7,035 in excess of the 2%-of-AGI floor). They would also deduct the $29,296, subject to the 2% of AGI floor, leaving a deduction of $26,745.08. Thus, their total deductions are $39,280.08, making their taxable income $88,265.92. Based on the 2018 married filing jointly tax tables, this puts the couple in the 12% tax bracket, with a total tax liability of $11,297.50.


By using a QCD for their donation, they saved an additional $2,784.50, with no extra work.


So how do you set a QCD up?


The mechanics of making a Qualified Charitable Donation are simple.


All you need to do is direct your advisor to send a check from your IRA, to you, with your desired charity as the recipient. You can then forward the check to the charity. Likewise, some firms will send the check directly to the charity.


At the end of the year, you will need to let your tax preparer know the amount which was transferred as a QCD. You will still get 1099-R from your custodian which shows the distributed amount; you’ll just give your tax preparer a copy of your receipt from the charity showing how much you contributed and you should be set.


One thing to note is that the check must be made out to the charity directly. If the check is made out to you, you will be taxed on that amount.


Charitable Distributions In Short


If you’re over age 70.5, you should likely be using a QCD as part of your withdrawal strategy.


If you aren’t there yet, now is a good time to begin thinking about how you can position yourself to take advantage of these rules in the future.


Start by looking at how much you have saved in tax-advantaged accounts and then think about your plan for turning your savings into income that can support your retirement lifestyle.


By using, or preparing to use, a QCD, you can meet your RMD requirement and support your favorite charities, all while saving money on taxes both today and into the future.




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