Win-Win Charitable Giving

The Thanksgiving to Christmas period is that time of year when traditions and festivities come alive. One of the great by-products of these traditions is how many communities and individuals tend to be more generous and mindful of helping others. This is timely because it intersects at a point when many non-profit groups need funds for operating expenses and other timely initiatives.

Before writing that check, however, it is good to be familiar with strategies that have potential to be a win-win for the giver and the receiver.

There are numerous methods for “win-win charitable giving” that can be strategically used to maximize charitable gifts, but one of the more underutilized is called a Qualified Charitable Distribution (QCD), made a permanent feature of tax law in December 2015. This allows an IRA owner over age 70-1/2 to give funds directly from their IRA to charity – up to $100,000 per year – without having to include the distribution in taxable income. In simple terms, this method allows for making gifts with pre-tax money. Whenever you can “spend” pre-tax money, it is usually a pretty good deal.

QCD works in tandem with the Required Minimum Distribution (RMD) rules, which stipulate how much money the IRA owner must take out of the account each calendar year based on the owner’s age and size of the account. Charitable contributions via QCD offset the RMD dollar for dollar, thereby reducing taxable income. This can be timely because many IRA owners wait until the latter part of the year to satisfy their remaining RMDs.

Let’s take a look at a simple example. IRA Owner must take a RMD of $10,000 by December 31st. Owner also wants to give $2,000 to Charity and decides to use the QCD method. Assuming the process is done correctly, the RMD is reduced to $8,000. That means $2,000 went to charity without ever being taxed, and the RMD adds $8,000 to taxable income, rather than $10,000.

Keeping taxable income lower can also have other less obvious benefits as well, depending on one’s specific income tax situation. For some with higher incomes, it may help with eligibility for certain tax credits and deductions that were otherwise phased-out because of income limitations. Others may benefit by reducing the portion of Social Security benefits included in taxable income or reducing Medicare premiums. In other words, there is potential for a positive domino effect created by reducing taxable income.

There are also many taxpayers who do not itemize deductions (where charitable contribution deductions are taken). This group may not realize any additional tax benefit from a charitable deduction. The QCD method could be advantageous here since the tax benefit is not a deduction, but a distribution that avoids being taxed at all.

At this point, it is important to note a few restrictions. First, certain charities are not eligible to receive QCDs, including donor-advised funds, private foundations, and supporting organizations. You are not allowed to receive any benefit in return for your charitable donation, such as golf tournament entry fees or auction items. Second, not all retirement accounts are eligible for QCDs. For instance, 401(k) plans are not eligible. SEP-IRAs and SIMPLE IRAs are not eligible if they are “active,” but are eligible if they are “inactive” according to IRS definitions. Inherited IRAs can be used, even though the account owner may not be over age 70-1/2.

For those with charitable intent, QCD is good to have in the toolkit. There are others as well. If nothing else, win-win charitable giving works best when seen in light of our larger financial picture. Investments, retirement, taxes, and other facets need to be looked at together to see how gifts can be maximized, both for the good of the giver and the receiver. After all, the more net wealth you can keep and create, the more you can give to help people. It’s a win-win.

Chad Starliper, CFP® is a Senior Financial Advisor with Rather & Kittrell and can be reached at [email protected]