Seniors approaching age 70 and over age 70 can strategize their charitable
giving to avoid Federal and State income taxes
giving to avoid Federal and State income taxes
Thousands in tax dollars saved with easy steps
By Jerry Hatton
In the past year I was able to inform two members of PUMC who had no idea of the tax savings they were missing out on. Apparently even financial advisors and tax advisors are not focussing on these opportunities for serious charitable givers. (Very concerning, in one case over $14,000 had been paid in taxes that could have been saved.) In fact there are a cluster of related steps that make it possible for almost anyone in their retirement years to take legitimate tax deductions.
1. Upon reaching age 70 and 1/2, taxpayers can have money distributed from their Traditional IRA directly to a charitable organization. IRA distributions are normally taxable, but Qualified Charitable Distributions are not taxed on the Federal or Ohio tax return. The taxpayer must not receive the distribution, it must go from the IRA Custodian directly to the organization. The distribution is reported on their tax return, but the QCD is subtracted when figuring taxable income.
2. Taxpayers at age 73 must make a calculation on their Traditional IRA and then each year receive a Required Minimum Distribution that is taxable. HOWEVER, they can use the QCD opton above to FULFIL their RMD. If their RMD is $16,000 and they direct $5,000 to charitable organizations, they are only taxed on $11,000 for that year. This strategy can help taxpayers concerned with drawing down their IRA too fast.
3. On the other hand, the limit per year per taxpayer is $105,000 in QCD’s. So if conserving the IRA balance is not a factor, taxpayer’s can give generously…tax free.
4. But wait there’s more!!! What if I do not have a Traditional IRA? My retirement funds are in my company’s 401K. Or perhaps a 403b or other similar plan. (These are numerous – Simple IRA’s, plans for self-employed workers, etc.) The taxpayer can CONVERT some or all of their retirement plan to a Traditional IRA. This maneuver is tax free. Once they own the Traditional IRA, they qualify to use the QCD option. Some taxpayers with 401K’s are already converting to obtain more control over the investments within their account. Example – I have $350,000 in my 401k. I roll $120,000 to a new IRA account. Now the $120,000 is eligible to make Qualified Charitable Distributions that are tax free. The remaining $230,000 is not eligible for QCD’s.
Most PUMC members will be in the 22% tax bracket with another 3% on the Ohio return. By having BOTH their contributions to the General Fund AND their Capital Giving made with QCD’s, they can save thousands upon thousands in taxes.
By using QCD’s and giving say $15,000 in one year to PUMC (and don’t forget other charitable organizations too!!!) a taxpayer would save $3,750 in taxes. And remember, they can meet their Required Minimum Distribution with the QCD!!!!
Taxpayers approaching age 70 and everyone over that age should work with their financial and tax advisors to find the best approach for their specific situation.