Part II: Strategic Year-End Donating

Good Morning Relaxing Retirement Subscriber,

Last week, with the giving spirit of the holidays upon us, I recommended taking a moment to strategically think about “how” you are going to donate before making donations to your favorite charities, non-profit organizations of your choice, and your alma mater.

This is especially important this year with the new tax law that took effect in January, 2018.

You may recall that Strategy #1 involved donating shares of appreciated investments instead of cash because it potentially reduces your tax bite even more, allows you to donate more, and increases the net benefit to the entity you choose to donate to.

This week, I’d like to share Strategy #2, which is available to you if you have reached age 70 ½ and you are subject to the annual Required Minimum Distribution (RMD) from your IRA.

If you have charitable intentions, and you won’t be spending your entire RMD, take a close look at taking a Qualified Charitable Distribution (QCD).

There are two important tax concepts at work to clarify here:

  1. RMD and QCD: Once you reach age 70 ½, the IRS mandates that you withdraw a certain amount from your IRA each year and pay income taxes on the amount withdrawn.

    As with Strategy #1, where most Americans donate cash or write a check to a charity after they have paid capital gains in order to free up the cash, many also do so after paying taxes on their RMD.

    With a Qualified Charitable Distribution (QCD), you make charitable donations directly from your IRA to the charity of your choice thus bypassing the multiple step transaction of making your required IRA withdrawal, paying income taxes, making a charitable contribution with the net amount, and then claiming the donation as a tax-deductible contribution.

  2. Itemized vs. Standard Deduction: If you already make charitable donations, what makes the QCD strategy so important is the change in 2018 tax law regarding itemized vs. standard deductions which doubled the standard deduction to $24,000 for couples and $12,000 for individual filers.

    Couple this with the new itemized deduction limit for state and property taxes of $10,000, and it’s more and more likely that you will be using the standard deduction because your itemized deductions may not exceed that $24,000 limit.

    While this is generally good news because filing is much simpler, it may mean that your charitable donations offer you no greater tax benefits because donations are itemized deductions.

    The huge benefit of the QCD in this case is you may deduct the charitable contribution even though you file using a standard deduction.

    For example, if your itemized deductions, which include your charitable donations, total $23,000, you would file using the standard deduction and your charitable donations would not have provided any additional tax benefits.

    However, if you donate directly from your IRA to the charity, you are able to deduct the contribution even if you file using the standard deduction.

Intentional and Strategic

The key with each of these strategies is to always be intentional and strategic with everything you do financially, even making charitable donations.

While making charitable donations is a very noble thing to do, taking a few minutes to explore your options not only increases your tax benefits, but the organization you donate to receives more benefits too.

If you would like to explore any of these in greater detail in your own unique situation, simply let us know.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)