Bigger bang from charitable distributions
Joel Dresang: Art, let’s talk about a tax provision that’s available for older retirees. It’s called the qualified charitable distribution. You told me recently that it’s one of the most exciting things you’ve seen in tax planning in a long time.
Art Rothschild: Yes, Joel. Tax planning and excitement, usually words that don’t go well together, but if you can get money back for doing something a certain way, and if it happens to involve tax planning, I’d encourage anyone to consider this opportunity.
Joel: So basically, what is it: a qualified charitable distribution?
Art: A qualified charitable distribution, or QCD, is simply a distribution directly from an IRA to a charitable organization by an individual at least 70½. And they’re limited to $100,000 per year.
Joel: So, and this has been available for a while. Congress made it a permanent provision a couple of years ago. Why is it so appealing now?
Art: Joel, it’s been available. It wasn’t appealing in the past because, quite frankly, most individuals just didn’t want to go take the extra steps of having money paid from their IRA to the charity, and they didn’t get much extra benefit. They would be able to itemize, take the deduction.
Congress significantly increased the standard deduction. So more individuals now will be taking the standard deduction, not itemizing. And doing the QCD, in effect, gives them an exclusion from their income, which is like getting an extra tax deduction on top of the standard deduction. So a tremendous benefit now to doing your charitable contributions this way.
Joel: Do you have an example to help illustrate?
Art: Yes. I’ll give you a monetary example. If someone gives $10,000 to a charitable organization directly from their IRA, and if they’re in a 22% tax bracket, they save $2,200. If they’re in a 12% tax bracket, that same $10,000 would save them $1,200 and possibly even more.
Joel: And possibly even more? That includes Social Security benefits?
Art: Yes. This is a quirk to the tax law, that Social Security benefits are taxed more, the higher your income. So by doing a qualified charitable distribution, you reduce your income and thereby would reduce that tax on Social Security. So there’s possibly a higher tax benefit to someone in a lower tax bracket, and that’s pretty interesting.
Joel: And this gets pretty complicated, and each individual’s circumstances are different, so you’d want to talk to your tax advisor about this. What’s a first step that people should take?
Art: The first step for anyone who’s giving money to charity is to take a look at your tax return if you’re over 70½. See if you itemized last year. Take a look at the tax tables, see what the standard deduction for you would be this year. And if you’re going to be taking a standard deduction, and if you are charitable, I’d encourage you to call your investment advisor, call your tax advisor and explore doing a qualified charitable distribution. Probably save you money.
Art Rothschild is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
(initially posted August 1, 2018)
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