By: Scott Van Den Berg, CFP®, ChFC®, CEPA®, AIF®, CRPS®, CMFC®, AWMA® and Mark Okamoto, AIF®, Senior Wealth Advisor
While some people make financial donations to charities for the tax deduction, others simply give for the joy of giving and the desire to help others. Regardless of the motivation, there are many causes and beneficiaries to which these charitable contributions are a lifeline.
The Tax Cuts and Jobs Act that went into effect in 2017 materially raised the standard deduction. In 2019, the standard deduction is $12,200 for single tax payers and $24,400 for those married filing jointly. This increase has sharply cut into the number of filers who will itemize their tax deductions.
However, if you’re a retiree over age 70½, you have a potential workaround that preserves the tax benefits of giving, even if you don’t itemize! Once you reach this age, you must start taking required minimum distributions (RMDs) from your individual retirement account every year. In what’s called a qualified charitable distribution (QCD), you can donate all or a portion of your RMDs, up to $100,000 a year, directly to charity.
While you don’t get to itemize and write-off this gift, you also don’t owe federal income taxes on the retirement account distribution. For a taxpayer in the 22 percent bracket, channeling a $10,000 RMD to charity saves $2,200 in federal income taxes, the same as if you’d been able to deduct it, and potentially more in state tax savings for those states with a state income tax.
A smaller tax bill is not the only potential benefit. By forgoing that RMD income, you reduce your adjusted gross income (AGI) on your tax return. And a lower AGI can mean less of your social security being taxed, lower Medicare premiums, or a chance to qualify for other deductions or tax credits that would otherwise not have been available to you.
To do a QCD, you simply instruct the custodian of your IRA to direct some or all of your RMD to one or more charities. The custodian must send the money directly to the charity, or send you a check made out to the charity, which you forward. In other words, you cannot collect the money directly and then donate it for the QCD to count. Additionally, the donation must be made during the calendar year for which you are filing a tax return.
If you’ve donated or plan to donate some or all of your RMD in 2019, you now have one more job to do; report it correctly on your return! The brokerage firm or custodian that holds your IRA will report it on the Form 1099-R as a regular IRA distribution, and you have to note on your tax return that it’s a QCD and not taxable. Remember, the IRA trustee does not know if the charity you are choosing is actually a qualified charity. The verification onus is not on them. So make sure you get a letter from the charity documenting your gift.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax adviser to see if this strategy makes sense for your unique situation and consider the following questions:
1. Are you likely to claim the standard deduction, and would you benefit from a QCD?
2. If you are younger than age 70½, how should you adjust your retirement spending to take advantage of this provision once you do turn 70½?
Do you have questions on retirement savings and distributions?
Disclosures: This content is developed from sources believed to be providing accurate information. This information is not intended to be tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.