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Tax Magic For Seniors: The QCD

By: Frank Armstrong

Many seniors find that their newly severely restricted itemized deductions fall short of their personal deductions ($24,000 married filing jointly). So, their charitable contributions may be worth zero on their tax returns. That’s a little bit of a bummer even though the primary objective was to benefit the charity. Most of us have a soft spot in our hearts for our tax deductions.

But, for seniors subject to making Minimum Required Distributions (MRDs) from their IRAs there is a special tax magic they can do. Instead of making a contribution they can’t use as a deduction , they can make their contribution completely disappear from their income. Poof! Just like that. It’s magic. By reducing your income by the amount of your contribution not one penny of your charitable contribution is wasted on taxes.

This particular magic, called a Qualified Charitable Distribution (QCD), is limited to the amount of their MRD or $100,000 whichever is less. However, the spouse may also make a QCD subject to the same limitations.

For this magic to work, the distribution must come directly from the IRA. In other words, don’t take a distribution and then write a check to the charity. Have your custodian make the contribution directly from your IRA.

Details, Details

• Make the QCD before you take your full MRD.

• If your contribution exceeds the above limits, you can’t roll the excess forward.

• Your custodian will report the distribution on a 1099-R, but it won’t be added to your taxable income.

• If your contributions are less than your MRD, the balance will be added to your taxable income.

• The Charity must qualify as a 501(c)-3 eligible to accept deductible contributions.

• You should obtain an acknowledgement letter from the charity for IRS purposes.

• If you live in a state with one of those pesky income taxes consult your tax professional about specific provisions there.

• The contribution must be timely to count towards your MRD, which is generally December 31.

• You can’t also deduct the same contribution (The IRS frowns on double dipping).

• See IRS Pub 590-B for any other questions.

The process is easy. Your custodian, tax professional or investment advisor can guide you through it.

Voila! Tax Magic for Senior Citizens.

Generally speaking, if you want to make a charitable donation, simply writing a check may be the least tax efficient way to benefit them. But, the QCD is such a good deal from a tax standpoint that if you must make MRD’s it should be your default method of making charitable contributions.

We Can Help

The QCD is just one of many techniques you might use to take control of your taxes. But, the time to be thinking about your income tax is before New Year’s Eve. After that, it’s too late to do anything but tally up the bad news.

Investor Tax Services, our fully owned accounting firm, is proactive in assisting our clients with tax planning and tax preparation. While our investment process is tax efficient, there are numerous additional ways to legally minimize your tax burden through tax planning.

Save time and taxes. By integrating tax sensitive investment management with comprehensive tax planning and tax preparation, Investor Solutions offers a one stop solution for quality financial administration.

Call Louis Feldman, JD, CPA, CFP, PFS for a no obligation discussion of your personal situation and ways we might further serve you.