Over 70 ½ And Charitably Inclined?

Retirement, Income, Tax & Estate Planning.

Over 70 ½ And Charitably Inclined?

February 21, 2018 Taxes 0

Are you 70 ½ and taking Required Minimum Distributions (RMDs)?  If so and if you are charitably inclined-whether to your church, synagogue or favorite non-profit-you should read on.

Tax season is well underway. Best of luck to everyone as you complete your 2017 tax returns. Of course, one of the big topics of discussion around our office lately is the tax reform bill recently passed by Congress and now in effect for 2018. There has been a lot of hubbub about the changes and whether they’ll be a net positive or negative for most people. I won’t comment on that, but I will share one way that many of you might be able to lower your tax bill for 2018: Qualified Charitable Distributions.

Qualified Charitable Distributions, or QCDs, are a tax-saving option for folks over 70 ½ years old who must take Required Minimum Distributions from their IRA accounts and who are philanthropically inclined. Essentially, if you’re already giving to a charity or to your church, you have the option to make those charitable contributions directly from your IRA accounts, effectively reducing your tax liability on the IRA withdrawals.

Under the new tax law, the standard deduction has been increased to $12,000 for a single filer or $24,000 for a married couple.  Combined with the new cap on state and local taxes that can be deducted, many more taxpayers are expected to take the standard deduction rather than itemize.  As a result, your normal charitable contributions may become less beneficial from a tax perspective. But a recent article in Investment News (read here) laid out a tax-saving end-around.

If you are over age 70 ½ and do not need all the income you are required to take from your IRA accounts, QCD’s can be used to effectively lower your tax burden under the new system. It works like this: Say you decide that you don’t need all (or part) of the income you must take via RMD from your qualified accounts. Rather than being forced to take (and pay income taxes on) a distribution anyway, you could make a contribution to your favorite charity directly from your IRA account. This Qualified Charitable Distribution prevents the funds from being distributed to you, thus excluding the QCD amount from your taxable income. You may contribute up to $100,000 annually from your IRAs directly to charities.

As with most tax issues, there are some rules that must be followed to assure you properly account for the distribution. First, you must directly transfer the funds to the charity; any funds that you take as a normal distribution and subsequently donate will not count.  There is also the age requirement mentioned above—you must have reached age 70 ½ by the date of the qualified distribution. Finally, it has to be a pure donation; nothing can be received in return for the donation.

Qualified Charitable Distributions aren’t for everyone, but they can certainly be beneficial in cases where the RMD funds are not needed to meet living expenses and you want to avoid paying taxes on that income.  If that sounds like you, feel free to reach out if you’d like to discuss a QCD or anything else regarding your Required Minimum Distributions. And good luck completing your 2017 taxes!