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Tax Savings Idea for Those 70 1/2 and Over

Posted Nov 05, 2019

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As you may already be aware, the standard deduction amounts were increased in 2018 which resulted in fewer people itemizing their deductions. Those of our clients who use the standard deduction miss out on several popular tax breaks, including claiming a deduction for any donations they make to a qualified charity. This means you may be receiving little or no tax benefit for your charitable giving when you had been in prior years.

 Can I get a better tax result under the new rules?  Instead of taking monies out of retirement and then contributing monies to charities, consider making Qualified Charitable Distributions (QCDs). QCDs are direct transfers of funds from your retirement accounts to qualified charities. These transfers do not count as taxable income on your return and the proceeds benefit your preferred charities. They no longer count towards your charitable (itemized) deductions, but as we’ve stated here, you may not have been receiving a tax benefit from those deductions any longer anyway. QCDs also count towards your required minimum distributions (RMDs) if taken out by December 31st. Other restrictions and requirements include:

•    Maximum QCD is $100,000 per spouse or taxpayer per calendar year

•    Taxpayers must be 70 ½ or over, in other words subject to taking RMDs

•    Recipient(s) must be a 501(c)(3) charitable organization (no private foundations or donor-advised fund sponsors)

•    Eligible IRAs include Traditional, Rollover, Inherited, SEP (inactive), and SIMPLE (inactive) plans. You may take QCDs from Roth IRAs but there is no tax advantage.

Please note that you should not make donations to Arizona tax credit charities using a QCD. You already receive a dollar-for-dollar tax credit for these as opposed to a charitable donation deduction. Therefore they wouldn’t be eligible for QCD treatment.  

Please also note that you will need to work with your IRA custodian to correctly accomplish a QCD since the distributions must be made directly out of your eligible account. As your tax preparer, we will need documentation of these charitable contributions made directly from the plan in order to complete your return properly.  The distribution tax form you receive at the end of the year (Form 1099-R) does not indicate that a QCD has been done.

 How do I know if this will help me? If you did not itemize on your 2018 tax return or won’t in future years, have required minimum distributions out of your IRA or similar type retirement plans, and have not yet taken those RMDs for the 2019 tax year, then please reach out to our office so we can help determine if this is a viable tax strategy for you. Even if it doesn’t directly lower your current year tax liabilities, it could potentially impact future Medicare premiums, which would be based on a reported income figure that is made lower by use of QCDs.

 Is this a one-time chance to lower my taxes?  This provision has been around for some time, and has been made as permanent as tax law can be going forward.  If you’ve already taken your 2019 RMD and have no plans on making additional charitable donations for tax year 2019, keep it in mind as you set plans for 2020 and beyond.

Daniel Rock, CPA
Director





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