Wednesday, August 23, 2017

Charlie and Rita Match Charity with a QCD


The names in this story have been changed to protect the charitable, but at Geyer Law, we believe that using QVCs to channel IRA distributions directly to charity is a story worth sharing.
As we explained in our blog post last week, when you reach the age of 70 ½, whether the funds are needed or not, you must take minimum withdrawals out of your IRA.  It’s possible that you, like many of our Geyer Law clients, might now be in a position to make substantial gifts to one or more charities. You understand the general rule: money you withdraw from your IRA accounts will be fully taxable as ordinary income, and, conversely, money you donate to charity will generate a tax deduction.

Last week we shared a particular article we had found in the Journal of Financial Planning about ways Qualified Charitable Distributions (QCDs) can create tax savings. With a QCD, IRA owners who have reached age 70 ½ can move money directly from their IRA account to a charity of their choice.  No income is reported, and no charitable deduction is claimed.

The authors of the Journal article offered several important reasons why the direct IRA-to-charity QCD tactic was better than first taking a Required Minimum Distribution, then contributing the proceeds to charity.  Out of the specific examples that were offered, one (the article refers to them as Jack and Jill) most closely resembles a composite of some recent situations faced by Geyer law client couples. (It’s important to remind readers that we don’t offer tax advice; instead we work in cooperation with clients’ tax advisors to coordinate tax saving and estate planning.) For instructional purposes, I’ll assign the pseudonyms Charlie and Rita.

Charlie and Rita, a high net worth couple, are both in their early 70she’s a retired business owner, she’s a retired professional practitioner). When Charlie wanted to use his IRA Required Minimum Distribution as the source of a $100,000 contribution to their church, we worked alongside the couple’s tax advisor to create the most tax-effective way to accomplish their estate planning goal of reducing the size of their taxable estate. A Qualified Charitable Distribution turned out to work well in Charlie and Rita’s situation. 
  • Less of their of social security income was subject to tax
  • They avoided a hike in their Medicare Part B premium
  • They lowered their federal income tax
  • They reduced the size of their taxable estate
  • The full amount of the QCD was able to be excluded from income, even though the contribution exceeded the percentage of AGI that would normally have been applied to their charitable contributions
For Charlie and Rita, a QCD beat the first-take-RMD-then-contribute route!

by Rebecca W. Geyer 

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