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Tax Saving Strategy for the Charitably Inclined

 

What are Qualified Charitable Distributions (QCDs)?

Under the IRS tax code, individuals who are older than 70½ must take Required Minimum Distributions (RMDs) from their pre-tax IRAs, whether or not they need the cash to pay for living expenses.  These distributions are treated as income on the recipient’s tax return, which in turn increases taxes owed and potentially impacts other tax and deduction calculations that are based on Adjusted Gross Income (AGI) and Taxable Income.

In 2006, the Pension Protection Act stipulated that those over age 70½ could make a donation of up to $100,000 directly from their IRA to a charitable organization, and avoid any taxation on the distribution.  Additionally, these direct distributions help satisfy the RMD requirements in the year that they’re made. While these donations cannot be claimed as itemized deductions on the taxpayer’s return, the ability to reduce taxable income is generally equal to or better than the option to increase itemized deductions.

The following rules apply:

  • The taxpayer must be 70½ years or older.
  • The distribution must be issued directly to a qualified charity.
  • The distribution must come from an IRA (distributions from SEPs or Simple IRAs are not eligible. Roth IRAs do not require RMDs and are not included in taxable income).
  • The QCD portion of the distribution is limited to $100,000 per taxpayer.
  • The distribution must be made during the calendar year.
  • The distribution cannot be claimed as an itemized deduction.

 

How are QCDs Superior to Itemized Deductions for Donations?

As an example, let’s assume that a married couple who are both over age 70½ have about $100,000 of Adjusted Gross Income that is made up of pension distributions, the RMDs from their IRAs, and the taxable portion of their Social Security.  If this couple chose to make $10,000 of QCDs from their IRAs to their favorite qualified charity, rather than paying the $10,000 out of another account and itemizing their return, they could potentially save over $2,000 in taxes. That’s not a deferral of taxes, it’s a real tax savings in the current year achieved through a little bit of careful planning.

Since your circumstances are unique, it’s important that you work with your Financial Advisor and CPA to determine the tax savings that you could personally gain from the use of QCDs.  If you’d like to learn more about how the advisors at HFG Trust can work with your CPA to take advantage of this and other tax reductions strategies through our wealth management and planning services, please don’t hesitate to give us a call.

 

Paul Hansen, CFP® CPA

Financial Advisor

LEGAL INFORMATION & DISCLOSURES

This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Community First Bank, HFG Trust, and HFG Advisors have no duty or obligation to update the information contained herein. Further, Community First Bank, HFG Trust, and HFG Advisors make no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services, banking services, or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Community First Bank, HFG Trust, and HFG Advisors believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be copied, reproduced, republished, or posted in any form without the prior written consent of Community First Bank and/or HFG Trust and/or HFG Advisors. HFG Advisors, Inc, is a wholly owned subsidiary of HFG Trust, LLC. HFG Trust, LLC is a Washington state-registered Trust company and wholly owned subsidiary of Community First Bank.