If you have a charity that you’re passionate about or just want to give back, there are a lot of considerations for charitable giving that need your time and attention. One of the best feelings when you secure your retirement is having the opportunity to help others.
Of course, if you’re not charity inclined, there’s no pressure to give money away.
However, if you want to start getting involved in charitable giving, you need to first consider how to break down your income.
Simple Income Breakdown
When we first start the retirement planning process with our clients, we help them break their income down into the following:
- Essential needs – what you need every month to live
- Wants – vacations, cars, remodel a house, etc.
- Legacy – leaving money to children, etc.
Charitable giving does have a lot of benefits, and you can also leverage your giving to reduce your tax burden.
However, if you’re still considering charitable giving, one topic that you might want to know more about is QCDs.
What are QCDs?
Qualified charitable distributions (QCDs) are common, especially close to the end of the year. When you want to make the most efficient use of your money, you can do so with what is known as a QCD.
Many people will take money out of their bank accounts annually and give money to charity.
However, when you’re 70 and a half, you can start taking QCDs directly out of your IRA. Annually, you can take out $100,000 in QCDs from an IRA without a penalty.
If you take the money out of your IRA, you’re taking out your donation and it is not taxable.
When you turn 72, you also need to take a required minimum distribution from your IRA. Even if you don’t need the money, it needs to come out of your account. For example, let’s assume that you’re required to take $20,000 out of your IRA each year.
You’ll pay taxes on this $20,000.
QCDs allow you to take money out of the $20,000 without paying any taxes on it. For example, let’s assume that you donate $5,000 per year. If you set up a QCD properly, the $5,000 will come out of your minimum distribution of your IRA tax-free.
When you do this, you’re:
- Maximizing your charitable distributions
- Reducing your tax burden
So, you might be required to take out $20,000 from your IRA each year, but you’re only taxed on $15,000 because of the QCD that you have in place.
However, you need to set up your QCD properly.
How to Setup a QCD Properly
First and foremost, you want to go to the institution that holds your IRA. The brokerage is Charles Schwab, TD Ameritrade, etc. You go to this institution and:
- Let them know you want to set up a QCD
- Ask for the check to be made directly to the charity
- Include an EIN
- Include the charity’s address
A common mistake that people make is writing the check out to themselves and then making a distribution. If you make this mistake, you’ll have to pay taxes on this money.
You can then take the QCD check yourself and give it to the charity or have the check sent to the charity directly.
Ideally, you’ll hand the check to the charity yourself so that you can receive the receipt for the donation.
You must make all of your charitable contributions by the end of the year. Additionally, the charity needs to cash the check by the end of the year. While setting up QCDs may seem tedious, it’s very advantageous and can help you reduce your tax burden while offering substantial charitable benefits.
From a tax-advantageous perspective, there is one additional benefit that you’ll want to consider: stock donations. If you have a stock that has significantly appreciated in value, you can donate the stock to avoid paying capital gains on it.
However, we don’t see this scenario happen often with our clients.
Working With a CPA is Important
While you’re giving money to charities, it’s also very important to take as much tax advantage as possible. A CPA or other tax professional will be able to help you reduce your taxes when donating to charity.
A CPA can help you think through reducing your taxes.
Additionally, a CPA may also help you determine how much you can give:
We suggest coming up with a charity-focused financial plan. We walk our clients through the entire process so that you can have a clear picture of how much you can afford to give. In most cases, we run scenarios that show you what happens if you donate a certain amount each month to your retirement plan.
Potential Pitfalls of Making Charitable Contributions
If you’re making a QCD, it’s crucial that you go through the process with a professional. You don’t want to withhold the taxes on the QCD. In some cases, you may want to take your own distribution and then another for the QCD.
Ideally, you’ll start the process early on so that you have the time to make sure that your giving works in the best way for you.
Sure, you’re donating money out of the goodness of your heart, but that doesn’t mean that you shouldn’t take advantage of the tax perks offered to you.
Also, another important factor to consider is timing.
If you decide around December 20 or later that you want to make a charitable contribution, it’s very unlikely that the process can be carried out before the end of the year. Due to the market being closed for the holidays, there is often not enough time to go through all of the processing time to use your contribution for a tax deduction.
Ideally, we recommend that you have this done in November.
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