PLANNING AHEAD: Year-end tax strategies can include QCDs [Column]

At about this time Americans looking to save taxes for the 2022 tax year might be casting about for strategies. One of these that can be beneficial for some taxpayers age 70½  and above, is a Qualified Charitable Distribution or QCD.

QCDs can use the federal tax code to benefit taxpayers, mostly in the upper income brackets, who are older and must take Required Minimum Distributions (RMDs). Here is how this works and how QCDs might help.

• Required Minimum Distributions. Required Minimum Distributions for affected seniors can become the bane of their existence since, as taxpayers above the given age they must withdraw given amounts based on their age from their traditional retirement accounts and pay taxes. The reason for RMDs from a governmental standpoint is obvious. Traditional IRAs (and rollover IRAs and so on) gave a deferred tax benefit. If taxpayers were permitted to continue the deferral indefinitely the government would never recover on the tax deferral.  QCDs known as Qualified Charitable Distributions, help to soften the blow by providing some relief by donating to qualified charities so, in the right case, they serve two purposes, one being to save some taxes that otherwise can be due and the other to benefit a favored qualified charity.

• QCDs — The Process. If you are interested in learning more your first step would  be to contact your IRA’s custodian (where your IRA is held) and indicate you are interested in making a QCD. Some custodians provide step-by-step information to get started on line which you can then follow up directly with their representative.

• When RMDs are required. How it works. If you hold one or more traditional (not Roth) Individual Retirement Accounts (IRAs) or similar tax qualified funds (such as SEP IRA, SIMPLE IRA or 401(k) or 403(b), you reach a point when you are required by the federal government to begin to withdraw money in specified amounts (the RMD) from the account. If you reached the age of 70½ in 2019 or earlier for IRAs, you must take your first RMD by April 1, 2020. If you reached age 70½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.

• How RMDs work. Taking your RMD adds these funds to your taxable income which can have the unwelcome effect of potentially pushing you into a higher income tax bracket. It might also limit or eliminate some types of tax deductions such as personal exemption and itemized deductions and sometimes trigger higher taxes on Social Security income. So, even if you do not want or need the distribution from the account, you are required to take it and count it in your income. There is a substantial penalty if you do not do so.

Here is how a QCD can help.

• How QCDs work. A qualified charitable distribution can allow individuals who are required to take RMDs to donate up to $100,000 total to one or more qualified charities directly from a taxable IRA without the funds being counted as part of their income. You must, however, follow the rules so be careful and never attempt to do this on your own. Because QCDs do not increase taxable income, high tax rates, phaseouts, and other unpleasant effects of receiving the RMDs into income may be avoided or reduced in effect. Since the QCD also reduces the overall balance in the IRA, it also potentially can decrease the RMD required to be taken in subsequent years.

• When do you need to complete the QCD? If you want to make a QCD count toward your minimum annual IRA distribution it must be made by Dec. 31 of the tax year in question — so very soon.

• What kind of charitable contributions count? Not all charitable contributions necessarily count. QCD’s cannot be made to donor-advised fund sponsors, private foundations and supporting organizations, though these are categorized as charities. Donors should check to make certain the organization qualifies before making a gift.

• What kinds of charities might benefit by a QCD. You might check with your church as one possibility (churches generally qualify) or any number of worthy 501(c) (3) charities. Just make sure they qualify.  Again, consult with your CPA or financial advisor who is familiar with the process.

Janet Colliton, Esq. is a Certified Elder Law Attorney by the National Elder Law Foundation recognized by the Pa. Supreme Court and the American Bar Association and limits her practice, Colliton Elder Law Assocs. PC, to elder law, special needs, guardianships, estate planning and estate administration with offices at 790 East Market St., Ste. 250, West Chester, 610-436-6674, [email protected] She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.

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