Wealth Management & Financial Planning

Wealth Management & Financial Planning

Tax Planning

One Financial Strategy For Giving to Charity While Potentially Lowering Your Tax Bill

The intent of this column is to help educate people about their money so they don’t make inefficient financial decisions that lead to frustration and poor choices. One frustration occurs when families are both charitable and are taking required minimum distributions (RMD’s).

The IRS requires you to take RMD’s each year from your retirement accounts after you reach age 70½. The older you get, the larger the percentage required to be distributed annually, adding additional taxable income to your 1040 even if you don’t need the money! A solution to the problem for those charitably inclined is to make a qualified charitable distribution (QCD).

A QCD allows your required minimum distribution (up to $100,000 per year even if your RMD amount is less than that) to transfer directly to a qualified charity. The gift to the charity from your IRA counts toward satisfying your RMD for the year; additionally you don’t add the income to your tax return! Beware, if you take the money from your IRA and then give it to the charity it will not qualify as a QCD. You don’t receive an itemized deduction for the gift but with the higher standard deduction starting in 2018 many families will no longer itemize at all. This is a huge win for families that are both subject to RMD’s and give to charity. Keep in mind; if you are married then you both of you can use this strategy provided the other conditions are met.

The reduction of income via the QCD reducing your required minimum distributions reportable income can add benefits for other parts of your tax return. Your social security might become less taxable, your Medicare Part B premium might be reduced, and you could fall into a lower marginal tax bracket potentially reducing both qualified dividends and long-term capital gains.

There are rules or conditions that you have to consider to make sure a QCD is right for you or your elder parents if you are assisting them which where we see this opportunity missed the most often. You must be at least 70½ years old when you make the distribution, funds must be transferred directly from the IRA to the charity, and the check cannot be made payable to you personally or you will pay the taxes.

What many miss with making a QCD is the second step mentioned above. For example, you can’t have the money go to the mission fund at the church. The church can do that but your contribution has to be the general fund. Additionally, you can get no material benefit from the gift like going on a church-paid mission trip with funds you donated or having an organization name a building after you. Please always consult your tax advisor to see if this is an appropriate strategy for your personal situation.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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