What retirees need to know about qualifying charitable distributions

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If you’re retired and donating to charity this holiday season, experts say there’s a way to lower your 2022 tax bill while supporting your favorite cause.

Despite economic uncertainty, the majority of American adults plan to donate similar amounts this year to last year, according to a recent Edward Jones study found.

Although tax breaks are generally not the primary reason to giveretirees can consider using qualified charitable distributions, or QCDs, which are direct donations from an individual retirement account to a qualifying charity.

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“For most people, most of the time, it’s going to be best if it’s your first source of charitable giving,” said certified financial planner David Foster, founder of Gateway Wealth Management in St. Louis.

If you’re 70½ or older, you can donate up to $100,000 a year, and that can count as a minimum distribution required if you transfer the money at age 72. Although the maneuver does not provide a charitable deduction, you may see other significant tax benefits, according to financial experts.

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The main benefit of a QCD is that the transfer doesn’t count as taxable income, Foster said.

Since fewer Americans itemize deductions, it can be difficult to apply for a write-off for charitable donations. However, retirees on the standard deduction may still qualify for a QCD as it will not form part of their adjusted gross income, he said.

Additionally, a QCD reduces their IRA balance, thereby reducing the size of future required minimum distributions, he said. “That’s a relatively small benefit for most people, but still relevant,” Foster added.

Higher Adjusted Gross Income Triggers Other ‘Tax Ramifications’

While most people don’t make charitable donations just because of the tax breaks, QCDs can offer a big one: lower adjusted gross income.

“It’s important because [higher] adjusted gross income often has many other tax ramifications,” said JoAnn May, CFP and CPA who founded Forest Asset Management in Berwyn, Illinois.

For example, more adjusted gross income can lead to higher monthly premiums for Medicare Part B and Part D, she said.

IRMAA is a big problem with my retired clients. They don’t like to pay.

JoAnn May

founder of Forest Asset Management

The surcharge, known as the Monthly Income Adjustment Amount, or IRMAA, add extra for one year once income exceeds a certain level.

“IRMAA is a big deal with my retired clients,” May said. “They don’t like to pay.”

Another example is the amortization of medical expenses. If you itemize deductions, you can claim tax relief for eligible expenses that exceed 7.5% of adjusted gross income. However, higher income creates a bigger barrier to claiming the deduction, she said.

Avoid These QCD Mistakes

One of the biggest problems with QCDs is that transfers aren’t separated on Form 1099-R, which reports retirement plan distributions to the IRS.

For example, if you withdraw $50,000 per year and $20,000 is for a QCD, the form will still show $50,000 in total distributions, even if only $30,000 is taxable income, Foster said.

“It’s up to you to keep track of how much of that money went directly to charity,” he said.

Additionally, the IRA payment must be made to the charity. If you write a check from your IRA to a charity in late December, it must be withdrawn from your IRA by December 31 to count for the year, May said.

Retirees, however, can get around the problem by having their caretaker sign the check.

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