Dear Client:

As we proceed through the fourth quarter of the year, I hope your 2019 has been a successful one to-date. If not, there is still time to make something positive of the year before we turn the
calendar.

This edition of my blog, on www.benebuslaw.blog, centers around a topic commonly pondered this time of year, charitable giving. This article will deal especially with qualified money, i.e., funds from an IRA, 401k or other retirement plan, and how to maximize the tax advantage of distributions from such plans.

Charitable Giving From Required Minimum Distributions

Definition
For the sake of understanding this article, a qualified plan will be defined as a plan holding funds on a tax advantaged basis. For example, a 401k receives employee deferrals on a pre-tax basis, but those funds with any earnings are taxed upon distribution. The same tax treatment applies to IRA’s, profit sharing plans, SEP’s, and SIMPLE’s.

Required Minimum Distributions
As you may know, qualified retirement plans are funded with dollars that have not previously been taxed. Generally, tax deferral helps build retirement assets quicker, which is a good thing.

The downside to qualified retirement plans requires distributions to be made each year beginning in the year the participant turns age 70-1/2. A complex set of rules surrounds this requirement, which I won’t address in this article. Suffice it to say, these distributions are known by a formal name, “Required Minimum Distributions”, or RMD’s.

RMD’s are deemed necessary by Congress and the IRS because the government wants this money taxed at some point. Some people might have the means to never touch this money and to continue to allow it to grow without taxation. RMD’s cancel the privilege of tax deferral and incur taxation on these funds beginning at 70-1/2.

While RMD’s sound like a backdoor way for the government to tax your retirement savings, (and it is), the tax laws allow for one more way to avoid taxation if you are willing to donate these funds to charity. A Qualified Charitable Distribution (QCD) allows the owner to give up to $100,000 per year to charity from the RMD without claiming the RMD as income, thus avoiding taxation on those dollars.

The IRA, or other qualified plan custodian will simply make the check payable to the charity for the amount desired by the owner. If the RMD is not $100,000, but the total account balance is at least $100,000, the entire $100,000 can be donated to charity.

Many individuals donate a percentage, such as 10% or 20%, to a charity from their RMD. The entire amount of the RMD does not need to be gifted to charity. But the amount taken as income rather than gifted to charity would be subject to income taxation.

Donations of the QCD may be done on an annual basis. This is not a one-time offer.

Further, charitable giving of this nature keeps your taxable income lower than it would be if the entire RMD is taken as income, thus potentially reducing your tax bracket and the amount of total tax owed. The total of your income could also affect taxation on any social security benefits received. So a
lower taxable income would further benefit your social security benefit.

Personal Tax Exemption Effect
One other item that should be considered when donating an RMD to charity. The tax law changes passed by Congress in 2017 became effective for the 2018 tax year. One of the major changes for individuals involved the significant increase in the personal standard exemption, that amount that income can be reduced by without proving any itemized expenses. With the rise in the exemption amount, the value of charitable contributions may have been reduced for many individuals.

However, there is another loophole potential with the increased exemption. If you donate to charity on a regular basis, you might consider making a larger contribution, but only doing so every other
year. By making a donation every other year that is twice as big as your annual contribution you would be potentially be able to deduct the entire contribution every other year. The total amount donated remains the same, but the tax benefit might be greater. For example, if you might normally donate $5,000 to charity in a year, a donation of $10,000 in year 1, but nothing in year 2 might exceed the standard exemption and allow you a bigger itemized exemption in the year you make the $10,000 donation. This method decreases the total tax due over the two-year period.

In the end, the financial aspect of donating an RMD generally can be beneficial from a financial perspective. Of course, financial gains are only part of the reason for making charitable donations. Helping the disadvantaged, funding a community purpose, and simply peace of mind might, all positive reasons, can play a part in motivating a person to make charitable contributions.

If you have not reviewed your estate plan in the past 3-5 years, it is strongly recommended you meet with your legal and financial  advisors to ensure a better process and smoother transition if fulfilling your goals for your estates.

Thank you for the opportunity to have been of service in the past. Feel free to call with any questions you might have in the future. As always, if you have appreciated my service and know a person who might also benefit from my services, referrals are welcome.

Regards,

Scott A. Becker, Esq.