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Tax Planning Opportunities for Charitably Inclined IRA Owners

posted on
Tax Planning Opportunities for Charitably Inclined IRA Owners

By: Bill Laird, CFA, CFP® | James Baley, JD/CPA

Over the past few years, tax law changes have created planning challenges and opportunities for owners of IRAs looking to maximize the after-tax value of their legacy.  We covered one key strategy, Roth conversions, in our DHG Insights feature Examining Roth Conversions in the Current Legislative Landscape.  For charitably inclined IRA owners over 70 ½, Qualified Charitable Distributions (QCDs) often provide the most tax efficient way of funding charitable goals.

A QCD allows an individual who is at least 70½ to donate up to $100,000 per year directly from their IRA to a qualified public charity.  The QCD is distributed directly from the IRA custodian to the charitable organization and the amount of the QCD is excluded from the Adjusted Gross Income (AGI) of the IRA owner.

There are several reasons why QCDs are particularly appealing in the current environment:

  1. After the Tax Cuts and Jobs Act limited itemized deductions and increased the standard deduction, almost 90% of taxpayers take the standard deduction rather than itemizing. Many of these non-itemizers are missing out on tax benefits they previously received for making charitable contributions. With a QCD, the IRA owner receives the tax benefit of their charitable contribution regardless of whether they itemize.

  2. The QCD provides an “above the line” deduction which lowers AGI which may also:

    1. Reduce the portion of Social Security that is taxable

    2. Help avoid Medicare Part B or Part D premium surcharges

    3. Increase the deductibility of medical expenses or other items subject to AGI limits

  3. For IRA owners taking Required Minimum Distributions (RMDs), the QCD can be particularly appealing as it can reduce or eliminate the amount of the RMD which would otherwise increase your tax.

    1. If you plan to shift some portion of your RMD to a QCD for a particular year, it is important to plan for the QCDs to be distributed proactively before you’ve distributed your RMD for the year.

    2. Once the RMD has been distributed to you, in most cases (other than some 2020 RMDs as described below), you cannot recharacterize any portion of that RMD as a QCD nor can you roll the RMD back into the IRA.

  4. Recent legislation changing the age at which RMDs are first required and waiving 2020 RMD requirements ought to be considered as part of QCD and IRA planning for 2020.

    1. As part of the CARES Act, individuals are not required to take their RMD in 2020 and in many cases, they can roll RMDs already taken back into their IRA until August 31, 2020.

    2. The SECURE Act changed the starting age for RMDs from 70½ to 72. Therefore, for those IRA owners turning 70½ in 2020, they won’t be required to take their first RMD until 2022.

    3. Although some IRA owners may choose to defer QCDs until 2021 or 2022 as a result of these 2020 RMD relief provisions, QCDs remain a good tool to consider each time charitable planning enters the conversation.

  5. The QCD provisions became a “permanent” provision of our tax law as part of the PATH Act of 2015. This solved a big planning problem from the decade prior, when IRA owners were uncertain whether QCDs would be allowed for a particular tax year until November or December extender bills were passed by Congress, often too late to satisfy RMDs through QCDs or take advantage of other QCD planning strategies.

Recent legislative changes have created an environment where professional guidance on proactive tax planning can create a benefit for individuals and their heirs. For those who are charitably inclined and eligible, a QCD is worth considering on a standalone basis or in combination with other strategies, including Roth conversions, as a way to help manage taxes today – as well as minimize the tax burden on heirs in the future.   Planning opportunities are unique to your circumstances and your goals, and DHGWA is prepared to help guide you through this decision-making process in conjunction with your tax professional.  

 

BL

Bill Laird, CFA, CFP®

Co-Chief Investment Officer

bill.laird@dhgwa.com

JB

James Baley, JD/CPA

Financial Advisor

james.baley@dhgwa.com


The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.