By Stephen Hassell, CFP®
So today I'm going to talk to you about a financial planning concept or tax planning tool called qualified charitable distributions.
You may hear of it referred to as QCD for short. The primary audience for this is going to be anyone who has IRA money and is nearing the age 70 and a half or later.
So if you've already crossed over that threshold and maybe you're 72 or beyond, you're probably already used to taking required minimum distributions from your IRA accounts.
These are amounts that the government says, Hey, whether you need it or not to live on, you need to start taking a certain percentage out of your IRA money year to year.
And so this qualified charitable distribution tool can be a way to magnify your charitable giving during retirement, or at the very least reduce your tax impact while doing charitable gifts.
And so I've got a 10 40 pulled up right here, and I'm just going to walk through some key areas and how all of this works out.
So for most people who are doing charitable gifting during the retirement phase of life, odds are, they're probably doing it from cash in their checking or savings account and things like that, but part of their income.
So part of the money that even ends up in their checking account is a result of either those requirement on distributions from IRA accounts or just IRA withdrawals in general.
And so when you think about your various income sources, when we look down here, if you're retired, you may have some money coming in from interest and dividends.
But then there's this IRA distributions field. So when you're required to start taking those minimum distributions at age 72 and beyond that's where this amount would get plugged in.
So imagine if you had $20,000 of requirement on distributions and you receive that amount you would also carry that amount over to the taxable amount.
So this would end up getting summarized with your other income sources, like social security pension or any other part-time work you may have.
And then ultimately you add up all of these items here to arrive at an adjusted, gross income figure. And so for my example, I'm going to use a hundred thousand dollars.
Let's assume there was $80,000 of additional items plugged in there, and we get to a total of a hundred thousand dollars of AGI.
Well, what the government does to simplify things is they they'll give people a standard deduction and most retirees or many retirees are just simply using the standard deduction.
They don't have enough in the ways of itemized deductions to to exceed the standard deduction. And so as of 2022, the standard deduction is roughly $26,000.
And so we can plug in $26,000 there. And when we take this a hundred thousand and we reduce it by the 26, we get to a taxable income of $74,000.
So that 74,000 will be what ultimately ends up getting taxed. In this example. Now I'll jump over here briefly to a schedule, a, the schedule a is where the itemized deductions actually get documented.
And one of those itemized deductions is gift to charities. So let's just say in a given year, you're giving away $20,000 to qualified charitable organizations or 5 0 1 C3 organizations, but you're doing that with money you've already received from your IRA accounts and elsewhere just from your checking account.
Well, if you're putting in $20,000 here and your mortgage is paid off, which oftentimes it would be at that age, you may not have enough itemized deductions to exceed the standard.
So in essence, you're not getting any tax benefit whatsoever from those charitable gifts. So let's jump back over here to the 10 40, if we were to instead engage in a qualified charitable distribution strategy what we would essentially be doing.
And just to keep math simple here, I'm going to assume that your required minimum distribution amount is $20,000 and that you also want to gift $20,000 to charitable organizations.
What would happen in this case is you still have $20,000 that shows up here under IRA distributions, but your taxable amount then becomes zero.
What this in effect does is, you know, to keep, keep our same logic going here with with the previous values. Well, this is going to lower our AGI by $20,000.
And so in this example, let's assume there’s 80,000 of other income sources, we get here, but then we still also get to, to take the standard deduction as well.
And so we ended up with $54,000 here instead. So we've lowered our taxable income by $20,000 simply by taking money that we would have given to charity anyway and not gotten a tax benefit from.
And we just did that off the top. Now administratively, the way to pull this off is you're going to either need to work with your IRA account provider or financial planner to have the money go directly from the IRA account To one or more charitable organizations.
You can not receive the money and then do it. It's got to go directly from the account to the organization.
And then secondly, you will need to work with your CPA to make sure that they know how to account for it.
With most account custodians, you will receive a 10 99 tax form that shows $20,000 in distributions. Most of those 10 99 forms are not going to then further delineate that you gave it away to charity.
So you're going to have to note that, Hey, we've got this $20,000, 10 99, but $0 is taxable in that case, or it could be a little bit of both.
So you don't have to do the QCD for the full amount. It really has more to do with your personal personal plan.
So I want to just take a quick look here at at a sample. And so this is going back to using the same math we talked about in that when looking at the 10 40, but if we just look at gross income from all sources, we have a QCD of a hundred or without the QCD, our taxable income ends up being 74,000 with the QCD.
Our gross income gets cut down by $20,000, but we still get to use that standard deduction thus lowering our income by $20,000.
When I look at a married filing jointly a tax rate from a federal perspective that puts us at about the 12% tax rate.
And so 12% times is 20,000. We get $2,400 in tax savings. So it may seem small. The limit is a hundred thousand dollars.
So if you have a really large IRA and you're very charitably inclined, you can do this strategy with up to a hundred thousand dollars a year from those required minimum distributions.
So hopefully this was helpful in helping you to better understand how to perform a qualified, charitable distribution, what it is.
If you think this might fit into your overall financial plan, I encourage you, whether you're a client of ours or somewhere else have this discussion with your financial planner and determine whether it makes sense for you.
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