Why You Should Consider Sending Your RMD Straight to Charity
By Joe Globensky, RFC®
Reasons People Give to Charity
There are many reasons why people give money to charity:
- Giving to charity makes you feel good,
- Giving to charity strengthens personal values,
- Giving is more impactful than ever,
- Giving to charity introduces your children to the importance of generosity, and
- Giving to charity encourages family and friends to do the same.
If you are at least 70½ years old and charitable-minded, keep reading!
Qualified Charitable Distributions
While the SECURE Act increased the RMD age for some to 72, it didn’t affect those that were already 70½ when it passed. And it also kept in place the starting age to make Qualified Charitable Distributions (QCDs) at 70½. How does that affect sending your RMD straight to charity? Let me explain.
The QCD was first introduced in the Pension Protection Act of 2006. It was repeatedly extended, sometimes retroactively, until it became permanent as part of the Consolidated Appropriations Act of 2016. And up until 2018, it was primarily for older taxpayers to meet their philanthropic goals while also satisfying the RMD requirements on their IRAs and qualified plans.
But since the Tax Cuts and Jobs Act (TCJA) was passed in 2017, QCDs can offer an additional benefit. TCJA nearly doubled the standard deduction while at the same time capping the itemized deduction for state and local taxes. So, many taxpayers who previously itemized their deductions now find it advantageous to take the standard deduction. And, while you may no longer deduct your charitable contributions, a QCD will allow you to make those contributions with pre-tax dollars, resulting in significant tax savings.
How QCDs Reduce Taxable Income
Here’s an example of how sending your RMD straight to charity helps.
For the tax year 2020, a married couple plans on filing a joint tax return. They are both 73 years old and anticipate $120,000 of adjusted gross income (AGI), including $60,000 in RMDs. They will not itemize deductions, but they will make $5,000 in charitable contributions. They will report federal taxable income of $92,600 ($120,000 AGI, less a standard deduction of $27,400 ($24,800 plus an additional standard deduction of $1,300 each for being over 65)), resulting in federal tax of $11,952.
If the couple makes their charitable contributions using QCDs instead, they will include the $5,000 in their RMDs but exclude it from their gross income. This will lower their taxable income to $87,600 and federal tax to $10,852, saving $1,100 in federal taxes with the same charitable outcome. This is why you should consider sending your RMD straight to charity.
How Can We Help
At Connections Financial Advisors, we can help you structure your charitable giving in an impactful, tax-efficient manner. If you haven’t taken advantage of QCDs from your retirement accounts, it’s not too late, and we can help. Please give us a call at (217) 605-8130 to discuss your options or send us an e-mail.
The example given is a hypothetical example and is provided for informational and educational purposes only. It is not representative of any specific situation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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