Dear Clients and Friends,
Charitable giving is an important aspect of your financial plan, especially here
at MOR Wealth Management. Despite pandemics, natural disasters, and
humanitarian crises, Americans desire to lend a hand has grown into a
steadfast tradition. The Lily Family School of Philanthropy states that
individuals, foundations, bequests and corporations gave an estimated $499.3
billion to U.S. charities in 2022!
You don’t need to have a tremendous amount of wealth to donate to a just
cause and make a positive impact - every dollar counts. However, the “how”
you make your donations is an important technical piece of your tax
strategy. As the title of this Weekend Reading states, there are certain
advantages that come with getting older - including the ability to make
Qualified Charitable Distributions, or “QCDs.”
A QCD allows individuals aged 70.5 or older to donate directly from their IRA
(inherited or not) to one or more charities (the charity must be a 501(c)(3)
organization). Most charitable gifts are tax deductible but using this “QCD”
method bears a slight advantage in addition to regular deductibility, which we
discuss below. The tax benefit is capped at $100,000 worth of donations per
person per calendar year and becomes indexed for inflation starting in 2024.
Required Minimum Distributions – Regardless of whether you need the funds
or not, the IRS does! You’re required to begin withdrawing funds from your
pretax retirement accounts at age 73 because you’ve never had to pay taxes
on that money. Instead of taking your RMD, you can donate those funds from
your IRA directly to charity: the donation will count towards the required
minimum amount, and it will not be taxed as income, as most IRA distributions
are. Let’s explore the difference between giving to charity directly from your
IRA vs. depositing your RMD into your checking account and then writing a
check to charity from there. Same thing, right? Not exactly!
If you give $100,000 directly to charity and you’re in the 37% federal tax
bracket, that’s $37,000 in tax savings from the income you don’t have to
report! If instead you deposit your RMD into your bank account, you are
effectively reporting $37,000 worth of income, which you could offset with a
$37,000 charitable gift deduction - but if you don’t itemize your taxes,
charitable gifts become non-deductible because you’re not actually deducting
anything. On the other hand, if you donate directly from your IRA, the
withdrawal does not get reported at all! So, even if you don’t itemize, you
circumnavigate the taxability of that distribution/gift.
Tax Savings – Since your RMD is considered income in the eyes of the IRS,
the additional income could potentially push you into a higher tax bracket even
if you offset this with a charitable deduction. This could result in the phasing
out or elimination of certain tax credits and deductions. The most glaring
impact could be related to the triggering of higher taxes on your Social
Security payments and elevated Medicare Part B & D premiums. The
incremental increase in Medicare premiums jumps dramatically with relatively
small increases in taxable income. See the table below if you feel like getting
sticker shock.
If you don’t itemize your tax return and instead take the standard deduction,
you would still benefit from making a QCD because this gifting method
removes the RMD from your tax return altogether. Therefore, the abovementioned
Medicare premium and social security complication would be
avoided. Since the tax cuts act was passed in 2017, it’s estimated that nearly
90% of Americans currently take the standard deduction, which makes this
QCD strategy even more valuable. To put this in context, about 12.2 million
filers deducted gifts to charity in 2021, compared with nearly 40 million in
2017, according to latest IRS data.
Making a QCD results in a multi-tiered benefit: charities receive more money,
your tax burden is reduced, you avoid the triggering of Medicare premium hikes, and more people benefit overall!
As many of you know, MORWM supports several local charities while regarding
philanthropy as a fundamental piece of our overall ethos. Here’s our Main Page
with the various charities that we passionately support. As always, if you have
any questions, or if you would like to make a QCD but aren’t sure who to
donate to or where to start, feel free to reach out.
Onward and upward,
Devin