fbpx

This year Congress made permanent the qualified determined charitable distribution, which means if you are over 70-and-a-half you can give money directly to church or charity from your retirement account. This donation, which can be up to $100,000, counts toward your required minimum distribution for the year, but it is not a taxable distribution.

It’s a tremendous opportunity for people over 70-and-a-half, but there’s also a great tax lesson in here for younger folks. If I do a charitable qualified distribution out of my retirement account at 70-and-a-half, then I don‘t even have to report it on page one as taxable income. It comes off adjusted gross income (AGI) at the bottom of page one, which is very powerful. If you aren’t 70-and-a-half, and you take funds that have already been taxed and donate to a charity, you are taking a deduction on schedule A. That deduction then flows into page two of your tax return.

Getting income off page one is much more powerful because the bottom of page one, the AGI, drives so many different numbers. The number on the bottom of page one can end up impacting how much of a deduction you can even take on page two because the higher the bottom of page one, the more you could be phased out on certain types of contributions and other tax deductions on page two. So, it’s always more powerful to take it on page one. This is true with everything we do with our tax planning.

Take, for example, the amount of taxes you pay on your social security income. If it’s a charitable qualified distribution, it doesn’t count against you. If you take it out and then donate it to charity, it does count against you when you calculate taxes on social security income. It also counts if you are taking a deduction on page two, and your income counts against you when you determine your Medicare premium.

I can’t tell you how many people have asked, “Why can’t I just take it out then make the charitable contribution?” More often than not, you aren’t going to get the full value of that charitable contribution if you are doing it on page two. Either you aren’t getting the full power of the deduction, or it’s effecting a phase out somewhere else on the return.

The qualified charitable distribution is a tremendous tool that Congress has finally made permanent. That should be part of your year-end tax planning every year. If you are going to do any type of charitable giving you should start with those retirement account dollars because it is going to keep those numbers from even showing up on page one of your tax return. As opposed to driving that number up and getting other phase-outs, or increase taxes on social security or Medicare premiums.

If you are younger than 70-and-a-half or even over 70-and-a-half, be sure that you understand that basic rule on how to control taxes on page one, which we have great control of in terms of investments and other things. Anything you do on page one is going to be much more powerful so take advantage of qualified charitable distributions if you are over 70-and-a-half and want to give to those less fortunate through charitable causes.



^

A Safer Retirement and Environment – What We’re Implementing to Help Keep You Safe: READ MORE