January 2016 ushered in a great tax savings opportunity for those who are 70 ½ or more years of age. That’s because 2016 is the year Congress finally gave permanent approval to the option of Qualified Charitable Distributions, or QCDs.
The Profile of a QCD Candidate
The only stipulations to participate in a QCD are that you are 70 ½ years of age or older, that you have a traditional Individual Retirement Account (IRA), and that you are willing to donate to an IRS-qualified charity.
QCDs might be especially appealing if one or more of the following is true: you are inclined to support charitable organizations; your IRA required minimum distributions (RMDs) push you into the 15% federal capital gains bracket; you are 70 ½ years of age and still working; or you have a large pension.
In a nutshell, a QCD allows you to redirect up to $100,000 of your RMDs to a qualified charity* on an annual basis.
Now here it is in simple terms: Normally, when you withdraw funds from your traditional IRA, the amount of your withdrawal is added to your adjusted gross income (AGI), thereby increasing your tax burden for the year. Alternately, your QCD reduces both your RMD and your adjusted gross income (AGI) by the amount of the your QCD. You will also benefit from a 0% federal capital gains tax on the amount of the QCD.
What a QCD Can Do for You
Making a charitable donation through a QCD reduces your AGI, creating a potential tax savings of 40% or more. This is quite a perk for high-income taxpayers. A number of other tax benefits exist, but the minutiae of those are better handled within the scope of a conversation with your financial advisor.
If you have already or will soon reach the age of 70 ½, it is time to discuss QCDs as part of your financial plan. You might just find that the benefits are too good to pass up.
*The IRS has ruled all 501(c)3 organizations are eligible, but that donor-advised funds and supporting organizations are not.
Tags: Tax Management
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