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As the year ends, retirees looking to give charitable gifts can consider making a tax-friendly donation from their individual retirement account.
The strategy, known as Qualified Charitable Distribution, or QCD, involves making a direct payment from an IRA to an eligible charity.
Retirees who are 70½ years old and older can transfer up to $ 100,000 per year, and someone who is 72 years old can use a QCD to meet the minimum payout required.
“For most people, most of the time, doing this as a first source for charity is better,” said certified financial planner David Foster, founder of Gateway Wealth Management in St. Louis.
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The main benefit of a QCD is that the transfer doesn’t count as taxable income, he said.
With fewer Americans listing deductions, it can be difficult to apply for a charitable gift write-off. However, retirees taking the standard deduction can still benefit from a QCD as it is not part of their gross adjusted income, Foster said.
In addition, a QCD will reduce their IRA balance and reduce the size of the minimum payouts required in the future, he said.
“That’s a relatively small benefit for most people, but it’s still relevant,” added Foster.
Benefits of lower adjusted gross income
While most people donate to charity not just because of the tax breaks, QCDs can offer one huge benefit: reducing adjusted gross income.
“That’s important because [higher] Adjusted gross income often creates many other tax implications, “said JoAnn May, CFP and CPA at Forest Asset Management in Berwyn, Illinois.
For example, a more adjusted gross income could lead to increases in Medicare Part B and Part D monthly premiums, she said.
The surcharge, known as the Income-Related Monthly Adjustment Amount or IRMAA, adds an additional fee for one year once income exceeds a certain level.
“IRMAA is a big problem with my retired customers,” May said. “They don’t like paying.”
Another example is the depreciation of medical expenses. Those who break down deductions can claim a tax break on qualified expenses that exceed 7.5% of Adjusted Gross Income. However, higher income creates a steeper hurdle to claim the deduction, she said.
Common QCD errors
One of the biggest problems with QCDs is that remittances are not segregated on Form 1099-R, which reports retirement plan distributions to the IRS.
For example, if someone withdraws $ 50,000 in a year and $ 20,000 is earmarked for a QCD, the form will still show $ 50,000 in total distributions even though only $ 30,000 is taxable income, Foster said.
“It is up to you to keep track of how much of that money has gone straight to charity,” he said.
In addition, the payment must be made from the IRA to the charity. If someone writes a check from their IRA to a charity in late December, it must be cleared by their IRA by December 31 to count for the year, May said.
However, retirees can work around the problem by letting their steward withdraw the check.
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