You should do a QCD with your RMD. More financial acronyms. For those who are at least 70½ years old, you are painfully aware of the required minimum distribution (RMD) rules affecting your retirement accounts. The government-imposed minimum withdrawal forces you to include the withdrawn funds in your taxable income. The purpose is for the government to collect some taxes on your individual retirement account (IRA) before you pass away.
With some care, you could make a charitable contribution with your RMD and erase that income from your tax return entirely.
First, we will talk about how beneficial this could be. Second, we’ll talk about the mechanics. Last, we will cover some of the restrictions.
We are oversimplifying the 1040 tax form with these hand-drawn images, however, they provide a clear and basic understanding. Knowing that many other factors have been ignored, final numbers will vary in real situations.
Assume a couple has $100,000 of income, including $20,000 of RMDs from their IRAs. Assume this couple donates $10,000 to charities each year. They are not likely to get a tax deduction for their $10,000 donation. At age 70½, you typically have minimal itemized deductions. When choosing between a $24,000 standard deduction and $10,000 of itemized deductions, you’ll pick the standard. This renders your charitable donation tax irrelevant. After reducing the income by $24,000, your net income runs through the marginal tax brackets to determine your tax bill. See image.
Using a QCD, you can recover your tax benefit from a charitable donation. The donation can be erased from your income from the beginning. You then take the standard deduction of $24,000 in addition to the $10,000 reduction. See image.
This puts $1,200 back in your pocket for giving a slightly different way.
It is accomplished by providing a letter or a form to your IRA provider telling the institution that you would like to send some money to a charity. The provider will mail a check to the charitable institution on your behalf. The funds cannot go to your bank first. Get the name and address of your charity ready and provide that to your IRA provider.
This gets a little tricky for those who are accustomed to paying a regular tithing each week or month. You need to stop paying from your bank, reduce your IRA withdrawals by your tithing amount, and then send those funds directly to your church from your IRA
Most of us will take the standard deduction. Most of us will get no benefit from trying to itemize our charitable giving deduction. If you know someone over 70½ who is charitably inclined and has tax-deferred retirement accounts, you should be nudging them (or maybe kidney-punching them!) to do a QCD. Of course, as always, we would be happy to answer their questions if they would like to call.
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