Many of you are BWFA tax clients, and our team of tax professionals assist you with filing your annual tax returns, doing quarterly analysis of the proper amount of estimated taxes where necessary, and a host of other tax analyses.
The most recent “tax season” was one of the most challenging for all of us, with the U.S. taxpayer community extending their tax filing in record numbers throughout the country.
For the first time in 30 years, the U.S. tax code was changed, which meant more time was required to thoroughly review returns to ensure that each client optimizes their situation. The 2017 Tax Cuts and Jobs Act was a major overhaul, with lots of changes, and the first time in a generation we had to absorb such a drastic wide-ranging change in tax rules.
One of the major changes was the big increase in the standardized deduction, which resulted in many people who itemized in the past to now simply take the standard deduction, as it is proving to be more beneficial than itemizing. So, only 8% of filers are expected to itemize this year, down from over 20% in the past, according to the Tax Policy Center.
For retired clients with charitable inclinations, there may still be a tax benefit from your charitable contributions even if you are not able to itemize: those over 70½ with IRA investment assets can use a work around that will maintain the tax benefits from giving, even when not itemizing those donations going forward. As described in previous BWFA Advisor magazine articles, you can make up to $100,000 in donations per year as a qualified charitable distribution (QCD) which is a dollar for dollar decrease in your taxable required minimum distribution (RMD). Retirees have flexibility in how much of the $100,000 they want to give in “QCD” donations. Given the tax law changes and the benefit of reducing adjusted gross income by the amount of the QCD donations, this strategy will become more and more popular.
An ancillary benefit from the reduced adjusted gross income from the QCD offset would be potential reduction in Social Security taxes owed. And since Medicare premiums are calculated from retirees’ modified adjusted gross income, the QCD reduction to income could mean an additional benefit through savings on the Medicare premiums.
Just looking at the initial tax savings—a taxpayer in the 22% bracket who donates $10,000 will save $2,200 in federal taxes by not having to claim that amount of their normal RMD taxable income.
For those states that do not allow for itemized deductions, the QCDs will allow retirees to pay less in state tax as well.
If you haven’t utilized this strategy before, note that there are a few things to keep in mind—all of which BWFA can assist with:
- In order for the QCD to work, the funds must come directly from the retirement account that requires a RMD. One must not ever take possession of the funds and then pay the charity themselves
- The QCD must occur within the calendar year for the offset to current year RMD income to be allowed
- Be sure that you do not miss the income and distribution offset on your tax return—the reporting from the custodian may not be clear enough for you, or an unsuspecting tax preparer, to notice—1099R reports are not completely clear
- Be sure the charity is a bona fide tax-exempt organization—with a good practice being to secure a letter from the charity stating they qualify for QCD
Your advisors are always available to assist you with this and any planning for tax optimization or other financial planning related matters.
Joseph Manfredi | MBA | Chief Operating Officer / Senior Portfolio Manager | firstname.lastname@example.org