Start the Year Right
Clients over age 70½ should be reminded to plan their required minimum distributions for 2017, but for those who normally give to charity, it’s a good idea to also discuss the benefits of qualified charitable distributions (QCDs) early in the year. Although QCDs up to $100,000 are all tax free, the real tax savings comes from using the QCD to take the place of required distributions. For example, Arthur has to take $60,000 from his IRA this year. In his 28% income tax bracket, he pays tax of about $16,800 on his IRA withdrawals. Arthur generally makes gifts to charity of about $5,000 annually. If he makes his charitable gifts from his IRA, he can reduce the tax to $15,400, even though there is no charitable deduction for his QCD.
For some clients, the reduction of adjusted gross income from QCDs may provide other benefits:
- Staying below the $200,000 (single taxpayer) or $250,000 (joint filers) for the 3.8% net-investment income tax;
- Remaining below the levels that will trigger cutbacks in itemized deductions and personal exemptions ($261,500 for singles, $313,800 for joint filers and $287,650 for heads of households);
- Avoiding the top 39.6% income tax bracket, which also makes taxpayers subject to a 20% capital gains tax rate, rather than 15%;
- Reducing the portion of Social Security benefits that are subject to tax;
- Lowering modified adjusted gross income, which can affect premiums on Medicare Parts B and D.
Clients need not make QCDs early in the year, but should reduce the amount they will take in required minimum distributions over 2017 to allow for their gifts to charity. Arthur, in the example above, could reduce monthly withdrawals, even if he doesn’t direct the custodian of his IRA to send the gifts to charity until later in the year. To the extent his QCDs take the place of his required minimum distributions, Arthur can enjoy some of the benefits listed above.
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