Something significant changed under the Tax Cuts and Jobs act several years ago. The standard deduction on our taxes increased significantly. For 2022 the standard deduction for an individual filing singly is $12,950 and for a married couple it’s $25,900. The effect of this change is that most individuals and families no longer itemize on their tax return and end up taking the standard deduction.
For retirees this is challenge especially for those who are making charitable donations and are subject to required minimum distributions (RMD) from their IRA account. A Required Minimum Distribution is for retirees who have a Traditional IRA account balance who reach the age of 72 and older. The government requires that these individuals take an annual distribution from their IRA based on their December 31st value in the previous year and their age in order to tax the value of the retirement account.
So where is the challenge? You’re over the age of 72 and required to take a taxable distribution (RMD) from your IRA account, let’s say it’s $10,000, then you donate that same $10,000 to charity. Under the current tax law, you receive the income but due to the higher standard deduction on your taxes you no longer itemize and instead take the standard deduction. As a result, you lose the tax savings of your charitable contribution.
Fortunately, there is a work around called a Qualified Charitable Donation or QCD. A couple quick rules in order to make a QCD, first you must be at least age 70 ½ when you make the donation to the charity. It isn’t enough that you will turn 70 ½ later that year. Second the donation must be made directly to the charity. You can’t receive the income in your name and then make the donation for it to count. You will need to work with your IRA custodian to make this happen. Third there is an annual limit of $100,000. This is per person so a husband and wife could each give $100,000 in the same calendar year. Forth the contribution must come from an IRA or Roth IRA, SIMPLE and SEP IRAs are not eligible if the account is still active meaning that an employer is contributing to the account.
The benefit of a QCD is that the retiree can make a charitable contribution to their favorite charities while satisfy the Required Minimum Distribution (RMD) without realizing the income on the tax return.
If you’re a retiree over the age of 70 ½ and making donations to a charity speak with your financial advisor or custodian about making a Qualified Charitable Donation. It’ll save you on taxes and allow you to do good in the world.
Trent Yost CFP® ChFC® AIF® is a partner at Red Cedar Wealth Advisors and has been a practicing financial advisor sense 1998. Advisory services offered through Arbor Point Advisors, LLC. Securities offered through Securities America, Inc., member FINRA/SIPC. Red Cedar Wealth Advisors, Arbor Point Advisors and Securities America are separate companies