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An IRA Qualified Charitable Distribution (QDC) May Be a Tax-Savvy Strategy for You

Your QDC may reduce your federal, state and local income tax burdens while enhancing Vista Grande Villa’s capacity to provide extraordinary living experiences. “It’s a win-win!”

When you file your 2019 income taxes, to maximize your deductions, you claim the larger of the standard deduction or the total of your itemized deductions. For example, under pre-2018 laws, a 70-year-old retired couple, Seymour and Beatrix, who pay $10,000 in state income tax, $5,000 in property taxes and $10,000 in charitable gifts would typically itemize their deductions, because they total $25,000 vs. their $15,200 standard deduction ($12,700 plus $1,250 over age 65 per person additional deduction). In this case, the couple obtained a financial benefit for their charitable donations.

Under the new law that took effect last year, the deduction for state and local taxes (both on income and property combined) is capped at $10,000. As such, their itemized deductions would now only total $20,000. In this case, instead of itemizing, the couple would claim the $26,500 standard deduction for married couples ($24,000 plus $1,250 over age 65 per person additional deduction).

To be clear, when you claim the standard deduction, you get no financial benefit for any of your itemized deductions, including your charitable donations. However, if you’re taking required minimum distributions (RMDs) from your traditional IRA, your tax advisor can show you how to capture a financial benefit from this charitable donation even if you claim the standard deduction.

Your QCD can be a tax-savvy strategy that allows you to transfer up to $100,000 per year from your IRA directly to a qualified charity like Vista Grande Villa. It is only available to IRAs and individuals who have reached the Required Minimum Distribution (RMD) age (70.5). Any amount processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability.

So, if Seymour and Beatrix, our 70-year-old couple who have an annual RMD between the two of them of $24,000, can instead direct $10,000 of it to Vista Grande Villa as a QCD, it will reduce their taxable income by $10,000 and they still get to claim the same $26,550 standard deduction. In this case, if the couple is in the new 24% tax bracket, by using this strategy, they would have saved $2,400 in federal taxes alone — and potentially more in state tax savings.

Current tax law makes it more difficult to obtain a financial benefit for your charitable donations, If you are tax-savvy and over age 70.5, consider taking advantage of the QCD. If you aren’t at that age yet, consider how you can intentionally position yourself to take advantage of these rules once you do turn 70.5. Start by evaluating how much you save in tax-advantaged accounts and how you spend your savings to support your retirement lifestyle. By using, or preparing to use, a QCD, you can meet your RMD requirement, satisfy your charitable intents, all while saving money on taxes both today and into the future.

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