Philanthropy for the Rest of Us: Age and Charitable Giving Benefits

You’re definitely not in Bill Gates’ league, but you do pride yourself on being a loyal supporter of one or more important philanthropic causes. You may have started small a number of years ago, but now days you’ve budgeted several thousands of dollars annually to support your favorite organizations. Likely, you complete this either with online donations at the organization’s website via credit card or you send a check from your primary bank account. You may have followed the advice from my recent Blog “How to Budget for Charitable Giving” to set up a separate account to receive regular contributions with which you fund your donations.

All of this is commendable, but it may not be the wisest approach to giving when you also consider how this impacts your personal finances, especially as one ages. You see, the tax code provides a unique and powerful advantage to those over age 70 ½ called the “Qualified Charitable Deduction” or QCD, but I prefer to call it the “Charitable IRA Gift” since few of us understand the term “Qualified” and “deduction” is a bit of a misnomer.

Under the terms of the tax code regarding the QCD, each of us over 70 ½ may contribute up to $100,000 annually from our IRA accounts to any public charity without reporting the income (or a deduction) on our personal tax returns. If you are used to taking charitable deductions for your gifts, you know the deduction only saved on taxes if it (as well as other deductible expenses) exceeds the standard deduction (currently $12,000 for an individual and $24,000 for a married couple filing jointly). These annual gifts also were only deductible to the extent they exceeded 2% of your adjusted gross income (AGI), so the donor could not get a full deduction for 100% of the gift. But the QCD gift does not show on your tax return (no reportable income nor charitable deduction), so 100% of the gift is “tax advantaged”. To make QCD’s, you just ask your IRA Custodian to make a check payable directly to the charity, taking the funds from your IRA account, and either provide the check to you to deliver or mail it directly to the organization.

There is another benefit provided to the QCD gift, which has to do with the tax impact of Required Minimum Distributions (RMD’s). Once an IRA owner turns 72 (formerly 70 ½), he or she must begin taking annual distributions from the IRA account (set by IRS formula) and report the full amount as taxable income on his or her tax return (on top of all other income). However, QCD gifts offset the RMD requirement, dollar for dollar, so that to the extent the QCD gifts are equal to or greater than the RMD, the requirement has been satisfied without reporting the RMD as income on one’s tax return.

Using IRA Charitable Gifts for making your donations is a much smarter tax saving strategy than simply gifting cash each year. You can donate IRA Charitable Gifts without adversely affecting your personal financial picture. This strategy is 100% efficient in that your RMD requirement is met (and taxes avoided) while the gift qualifies for tax advantages. Now, that is much smarter Philanthropy for the Rest of Us.

If you have questions or simply would like help developing a tax saving strategy using IRA Charitable Gifts, please give me a call: Richard Ward @ (949) 236-7844.

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