Using Qualified Charitable Distributions to Reduce Taxes by Troy Sharpe, CFP®

Qualified charitable distributions. What are they, what do you need to know, and can they help you save taxes in retirement?

[music] Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of the Retirement Income Show, and CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) .

Qualified charitable distributions can be a really cool tax planning strategy for those people who are age 70 and a half, and forced to take required minimum distributions and are also charitably inclined. Some context here. Whenever the Tax Cuts and Jobs Act was passed, otherwise known as the Trump Tax Cuts, many people lost the ability to itemize their charitable contributions, and therefore, they lost the deduction because the tax law, what it did is it increased the standard deduction that everyone received. If you typically donated $5,000 or $10,000 to charity and maybe you still do, you may have lost that deduction because the standard deduction is so high.

This is a tax chart here of showing what the standard deductions are for 2018 and 2019. If we’re married, filing jointly, we get a $24,400 standard deduction. That means no matter what your itemizations are, if they don’t surpass $24,400, you’re not going to itemize, you’re going to take the standard deduction. If you’re over 70 and a half and in a position where you’re forced to take mandatory distributions from your IRA, you also qualify for $1,300 per person additional standard deduction on top of this. That’s an extra $2,600 on top of the $24,400. That gets us to $27,000 in standard deductions before you can even begin to think about itemizing.

Because of these higher standard deductions, many people have lost the ability to deduct their charitable contributions. Here’s where the strategy comes in and works. If you’re forced to take required minimum distributions, you can consider a QCD, a qualified charitable distribution. What this is, we take this stock, we take the money directly from our IRA, give it directly to the charity. It’s going to count towards your required minimum distribution and you do not have to pay taxes on it. It’s an additional way to make a charitable contribution, help those causes that you support by taking money out of the IRA, giving it directly to them, that’s the caveat, it has to go directly from your IRA to the charitable institution.

It has to be an IRS-approved 501[c][3] organization. If you do that, it’s going to count towards your required minimum distribution, you will not have to pay taxes on it, and you still can get your $27,000 standard deduction to offset your other income. Important to recap here.

Qualified charitable distributions are for those who are over 70 and a half, who take money directly from their IRA to that 501[c][3] IRS-approved organization. It’ll count towards your required minimum distributions, you will not have to pay income taxes on it, and you can still take the standard deduction. This is a great tax planning strategy for those that are charitably inclined, are forced to take required minimum distributions, and want to give that money to charity. Do not send that money to yourself. First, you will owe income taxes on it, and you may lose the charitable deduction when you send it then to the 501[c][3].

Directly from the IRA to the institution, you can take advantage of the qualified charitable distribution strategy.

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