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Here’s a tax-smart strategy for charitable giving using IRA money

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There has been no shortage of it over the past few years ways to donate to charity. And there’s a special tax break for retirees who transfer funds from individual retirement accounts.

In 2021, individual Americans gave about $326.87 billion to charity, a 4.9% increase over the previous year. according to Giving USA.

Regardless of the cause they want to support, experts say retired philanthropists can consider a strategy known as a qualified charitable distribution, or QCD.

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QCDs are direct gifts from IRAs acceptable charity. If you’re 70 1/2 years old or older, you can donate up to $100,000 a year and it may count minimum distribution required as soon as you turn 72 years old.

While this maneuver doesn’t provide a charitable deduction, you could see other significant tax benefits, financial experts say.

“Most people will be better off doing this as their first source of charitable giving most of the time,” said certified financial planner David Foster, founder of Gateway Wealth Management in St. Louis.

The main advantage of QCD is that the transfer is not considered taxable income, he said.

Because fewer Americans itemize deductions, it can be difficult to claim a write-off for charitable gifts. However, retirees who take the standard deduction can still benefit from the QCD because it won’t be part of their adjusted gross income, Foster said.

What’s more, the CHD reduces their IRA balance, reducing the size of future required minimum distributions, he said.

“It’s a relatively small benefit for most people, but still relevant,” Foster added.

How a reduction in adjusted gross income pays off

IRMAA is a big issue for my retired clients. They don’t like to pay.

Joan May

founder of Forest Asset Management

The surcharge, known as the Income Monthly Adjustment Amount, or IRMAA, adds an additional fee for the year when income exceeds a certain level.

“IRMAA is a big issue for my pensioner clients,” May said. “They don’t like to pay.”

Another example is writing off medical expenses. Those who itemize deductions can claim tax credits for qualified expenses that exceed 7.5% of adjusted gross income. However, higher income creates a tougher barrier to claiming the deduction, she said.

QCD errors

One of the biggest problems with QCD is that transfers are not separate on Form 1099-R, which reports retirement plan distributions to the IRS.

For example, if you withdraw $50,000 a year and $20,000 is designated for QCD, the form will still report a total distribution of $50,000, even if only $30,000 is taxable income, Foster said.

“You yourself should monitor how much of this money went directly to charity,” he said.

Also, the payment from the IRA must be made to a charity. If you write a check from an IRA to a charity in late December, it must clear the IRA by Dec. 31 to count for the year, May said.

Retirees, however, can get around this problem by asking their custodian to cut a check.

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