How Retirees Can Cut Their Tax Bill: Qualified Charitable Distributions

Retirees

Tis the season of taxes.

Whether you use a CPA to file your return or you rely on online tax preparation services to get you through April 15th, one thing is sure. The financial decisions we make today will directly affect the amount of taxes we pay in the future.

One such missed opportunity is charitable giving.

If you or someone you know is a retiree that is 70 1/2 or older and is currently giving money to a 501(c)(3) charity, then allow me to introduce you to Qualified Charitable Distributions (QCDs).

When a person takes money out of their traditional IRA, that distribution is reported as ordinary income.[1] Yes, Federal tax law allows you to claim a deduction for the value of all property you donate to a qualified charity provided you are eligible to itemize deductions.[2] However, if your itemized deductions do not exceed the standard deduction, you lose out on that potential tax break.

Here's where QCDs come in!

A QCD is a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions.

Here's an example.

John is a 72-year-old retiree. He pulls $66,000 out of his IRA and deposits it into his bank account. He needs $60,000 for gross living expenses — the other $6,000 he tithes to his church. At the end of the year, John receives a 1099-R from the custodian of his IRA, reporting the $66,000 as taxable income. John is married and takes the standard deduction. Assuming his effective tax rate is 15%, John pays $6,240 in taxes.

Jessica is a 74-year-old retiree. She pulls $60,000 out of her IRA for gross living expenses and deposits it into her bank account. Jessica also donates $6,000 a year to a local charity. But rather than paying it from her bank account, she has the custodian of her IRA make a qualified charitable distribution directly to the charity. At the end of the year, Jessica receives a 1099-R from the custodian of her IRA, reporting she has $60,000 of taxable income. Jessica is married and takes the standard deduction. Assuming her effective tax rate is also 15%, Jessica pays $5,340 in taxes.

Although John and Jessica both took $66,000 out of their IRAs, Jessica saves $900 in taxes because she processed her donation as a QCD!

Understanding the concept is simple enough. Fortunately, putting it into practice is just as easy! To make a qualified charitable distribution, contact the financial institution holding your IRA and ask for the appropriate form. Sign it. Submit it. That’s it. The charity gets its donation, and you cut your tax bill. It’s a win-win!

Proactive planning is better than reactive tax planning. You just have to know where to look.

Stay Savvy, my friends.

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[1] https://www.irs.gov/newsroom/what-if-i-withdraw-money-from-my-ira

[2] https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

Disclosure: Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. 2020-94984 Exp. 02/22

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Lifetime Financial Growth is not an affiliate or subsidiary of PAS or Guardian. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Links to external sites are provided for your convenience in locating related information and services. Guardian, its subsidiaries, agents, and employees expressly disclaim any responsibility for and do not maintain, control, recommend, or endorse third-party sites, organizations, products, or services, and make no representation as to the completeness, suitability, or quality thereof. CA Insurance License # 0M64579