On September 16, 2021, Sand Hill CIO Brenda Vingiello, CFA joined the CNBC Halftime Report panel once again and discussed what positive catalysts investors canread more
Dual Benefit – Using Required IRA Distributions for Charity
The new tax law that went into effect this year changes many things, including the treatment of deductibility of state and local (property) taxes – the so-called SALT deductions. Prior to this year, taxpayers could deduct the full amount of these taxes from their Federal tax calculation. Beginning this year, that deductibility is capped at a rather low $10,000. Instead, providing some relief, the new law increases the standard deduction to $24,000 for married couples or half that for individuals. Hence, this may result in fewer taxpayers itemizing their returns, which, in turn, could mean less direct charitable giving out-of-pocket – since such donations might no longer provide any meaningful extra tax deductibility benefit. However, this same condition ostensibly makes something called the Qualified Charitable Distribution (QCD) more attractive. This favorable tax feature has helped many older taxpayers who are philanthropically inclined, but it was unreliable for many years because it was only temporary and often extended by Congress late in the year, sometimes retroactively. While it was made permanent a few years ago, the new tax law makes it even more compelling now.
The concept of the QCD goes back to 2005 in the immediate aftermath of Hurricane Katrina and the devastation it caused. At that moment, Congress created this new tax-related opportunity to encourage owners of Individual Retirement Accounts (IRA) to utilize their Required Minimum Distributions (RMD) to help in the effort to rebuild New Orleans and other impacted southern states, although any qualified charity was, and still is, eligible. Up to $100,000 worth of RMD can annually be given from an IRA directly to any number of qualified charities, and this amount will not count towards taxable income in that year – as it otherwise would be if one were to take the same RMD for oneself. Just to be clear, QCDs are not tax deductible like normal charitable contributions because this would be double-dealing. Instead, the earmarked amount, up to $100,000, simply does not count toward taxable income.
Only IRA owners over the age of 70 ½ are eligible to make QCDs because this is the same age at which one must start taking RMDs. The total amount of annual QCDs cannot be more than either one’s own personal calculated RMD in that year or the $100,000 maximum, whichever amount is less. For those who file taxes jointly, the spouse (if age 70 ½ or older) can similarly make QCDs within the same tax year from their own IRA. Moreover, this is year by year, not cumulative – that is, use it or lose it each year. For any QCD to count towards the current year’s RMD, the funds must come out of the IRA by the RMD deadline of December 31st.
The essence of this whole subject is that if one is charitably inclined anyway, QCDs possibly make more sense than ever before due to the new limits on itemization … because the donor avoids taking this same amount into taxable income. Again, this only works for qualified charities and not for private foundations, supporting organizations, or donor-advised funds. Plus, the donation(s) must come directly from the IRA. Ultimately, when filing one’s tax return, the IRA owner identifies and subtracts out any QCD gifts from the full RMD amount shown on the 1099-R, and any remaining RMD that they take for themselves is thus taxable.
As year-end approaches – and especially as people typically feel extra generous during the holidays – this concept of the Qualified Charitable Distribution could be useful. Since QCDs are now permanent and the new tax law increases their overall utility, such usage can now reliably be applied fresh in the New Year, too; and this might also make sense for those wishing to make more meaningful impact with possible larger combined gifts made in close timing of each other.
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