Episode 55: Tax Planning Strategies, Part 2: What is a QCD?

Here are just a handful of the things that you’ll learn:

This week, your host Jeff Montgomery alongside special guest Nick Craven, CFP®, continue the discussion on tax planning. Specifically, they tackle all things surrounding Qualified Charitable Distributions (QCD’s.) What are the benefits? QCD’s lower adjusted gross income, but why is that important? All these questions are answered, and more, on this week’s episode of the Fiscal Blueprint® podcast.


(0:30) Practical planning segment:


A quick disclaimer here, after all, we are talking about taxes: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to advise clients. So, unless you’re a client I can’t give you advice because I don’t know you. So, think of these as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that’s just common sense.


Continuing our tax planning discussion today we are going to talk about some ideas that you may not have heard of. Or maybe heard of but not fully explored


Last week we talked about the very popular strategy of Roth conversions, and we said this may make sense for some folks because I think most people believe tax rates are going to increase in the future.


We mainly spoke about income tax rates increasing. However, there are other ways that they could increase taxes in a very secretive or stealthy way. And one of those ways I want to talk about is the consumer price index. I don’t think a lot of people understand how many things are tied to the CPI.


(2:45) And the big change as of 2018 within the tax cut and JOBS Act is that they are now using a new consumer price index that will eventually raise your taxes. And that new index is called chained CPI.


The first thing to understand is that chained CPI substitutes cheaper products and services and thus measures inflation more slowly than the traditional CPI calculation. So, what this does is it has the effect of raising taxes because personal tax rates, tax credits, and the standard deduction are linked to this new chained consumer price index measurement period and this measurement measures the growth in the cost of living more slowly than the old law that used the traditional consumer price index.


So again, something to be aware of because we typically think of tax increases through very specific and measurable tax rate increases for example the 36% tax bracket will go up to 39.6% in 2026, however this, in my opinion, is a deceptive way and as I mentioned earlier, stealthy way, of raising our taxes without folks really paying much attention to it. And there are many ways in the tax code that our politicians do this.


so just because you don’t necessarily see a tax bracket rate increase or an actual tax bracket shrink in terms of what income levels are taxable at certain rates, doesn’t mean that you’re not going to pay higher taxes in the future!


Let’s talk about some other (not so well known) ways you could reduce your overall tax burden in RETIREMENT.


Today’s show is about QCD’s which stands for qualified charitable distributions.


(4:40) Changes to the charitable deduction: Under the Tax Cuts & Jobs Act, cash contributions to charities were reduced to 50% of AGI (Adjusted Gross Income).  That was widely considered a disincentive to contribute to charities. That was corrected later and extend through 2021 by the CAA and it is now 100% of adjusted gross income.


However, with an estimated 90% of taxpayers claiming the standard deduction anyway, much of the tax incentive to donate is taken away even with this change.


So, for folks that are terribly inclined, proper planning can be very impactful here!


We will get into bunching strategies on the next podcast but in today’s example, we want to talk about qualified charitable distribution’s or QCDs.


(7:00) Definition: A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. … In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income, which is unlike regular withdrawals from an IRA.


Let’s clarify just a little bit of confusion that comes with QCDs. As we know required minimum distribution from your IRA account now starts at age 72. That was from the secure act.


However, you can do a QCD beginning at age 70 ½, and the total amount of the QCD could be up to $100,000 directly from your IRA account to the charity.  Not the year you turn 70 ½!!! Only after you have already turned 70 ½!


Confusing right………because the OLD RMD rule was the year you turned 70 ½! So, pay attention to that if you are considering a QCD and have not yet turned 70 ½.


I have noticed it is rare that a QCD happens before age 72 or in this case after age 70 ½ because the main strategy here is that the QCD satisfies the required minimum distribution from your IRA.


So, at age 72 when you’re required to take a withdrawal out of your IRA and you are terribly inclined, you could simply send that amount or any amount up to $100,000 directly to the charity and you will not be charged income tax on that distribution.


This may make sense if you are in a high tax bracket because it drives down taxable income, you could benefit even further if you are married, and your spouse is also eligible to use their IRA for a QCD.


(13:30) Benefits:


  • The obvious one that jumps right out is that amount sent to the charity does not show up as taxable income, right?
    • It goes straight to the charity! You never received it!
    • If you took possession of the RMD’s first and then contributed to the charity as cash contributions, you are limited. Because in that case, you would have to itemize to get the full deduction!
  • Lowers AGI! Why is this important?
    • Could save you on IRMAA surcharges for Medicare part B and D
    • Much less likely, but it could also save you on the Social Security torpedo tax, where the provisional income calculation determines whether you will be subject to Social Security taxes. Part of that calculation is IRA withdrawals.
    • Could help you qualify for more medical expense deductions, right? Medical expenses are only deductible over 7 ½% of AGI. Well, if AGI is lower then possibly more medical expenses could be deducted.
  • Also helps those that are claiming the standard deduction (90% are!) but still want a charitable deduction. They could do a QCD



(15:30) Coachable Segment: Important Points to remember


  • Sounds simple but they must come out of the IRA by the RMD deadline
  • Must do before RMD is taken out or it won’t Satisfy the RMD. So please if you are going to do a QCD make sure you do this first! Before the RMD! “First dollars out rule”
  • The only people that qualify–first of all, it’s only for IRAs, not for plans. People get mixed up with that. Rollover!!
    • Why are you leaving your 401k at an old employer anyway?
  • Can only be made from the taxable portion of IRAs. Sometimes there is after-tax money in an IRA. This can be a nightmare. So, pay attention to that.
  • Beware of the annual limit on QCDs from all IRAs cannot exceed $100,000 per individual!
  • Helps to avoid potential IRMAAA surcharges on Medicare Part B
  • QCD is better than a deduction because it decreases your AGI, so that increases other benefits tied to AGI like the possibility of 0% capital gains tax, increase medical deduction, more state tax deductions.
  • Also, we are not going to get into this too much on this podcast but beware of the QCD anti-abuse rule. Meaning you can’t take an IRA deduction if you are still working and contributing to an IRA and do a QCD at the same time.
  • This must be reported on your tax return Line 4a and 4b. Make sure you look at your 1099 issued from the custodian. It could be missed and reported as a regular distribution and not a QCD. There’s no coding on a 1099. Every 1099-R has all kinds of numerical and alpha codes to tell the government what kind of distribution it is. There is no code, there never was for some reason, for a QCD.



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