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What retirees need to know about qualified charitable giving

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If you’re retired and donating to charity this holiday season, experts say there’s a way to cut your 2022 tax bill while supporting a cause you love.

Despite economic uncertainty, most American adults plan to donate the same amount this year as they did last year, a recent Edward Jones research found.

While tax benefits are usually not main reason for filingretirees may consider using qualified charitable distributions, or QCDs, which are direct gifts from an individual retirement account to an eligible charity.

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“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.

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 if you transfer money at age 72. While the maneuver doesn’t include a charitable deduction, you could see other significant tax benefits, financial experts say.

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

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

Higher adjusted gross income causes other “tax consequences”

While most people don’t make charitable donations solely because of the tax benefits, QCDs can offer a big one: a reduction in adjusted gross income.

“It’s important because [higher] adjusted gross income often has many other tax implications,” said JoAnn May, CFP and CPA, who founded Forest Asset Management in Berwyn, Illinois.

For example, a higher adjusted gross income can lead to higher monthly Medicare Part B and D premiums, she said.

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

Joan May

founder of Forest Asset Management

The copayment, known as the Income-Based Monthly Adjustment Amount, or IRMAA, adds an additional fee during the year if the 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. If you’ve itemized deductions, you can claim a tax credit for qualified expenses that exceed 7.5% of your adjusted gross income. However, higher income creates a tougher barrier to claiming the deduction, she said.

Avoid these QCD mistakes

One of the biggest problems with QCD is that the transfers are not separated on the 1099-R form that reports the retirement plan distribution 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 your IRA to a charity in late December, it must clear from your 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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