IRA Alert

Help clients use qualified charitable distributions to save on taxes

Advisers need to help RMD clients change the way they give

Apr 14, 2017 @ 3:46 pm

By Ed Slott

Charitable IRA rollovers, technically known as qualified charitable distributions, save taxes. So why aren't clients taking advantage of them? We're not seeing many people using them, when most clients who qualify should be. This tax benefit has been permanent since 2015, so no more guessing on whether it will last.

Qualified charitable contributions, or QCDs, allow taxpayers to make charitable contributions from their IRAs directly to the charity and to exclude that amount from income. Not everyone qualifies, though. It only applies to IRAs, not plans, and only for those IRA owners or beneficiaries who are 70 ½ years old or older. The QCD is excluded from income and can satisfy the annual required minimum distribution (RMD), up to the $100,000 QCD limit. No charitable deduction is permitted for this amount; otherwise that would double the benefit. But still, excluding RMD income lowers the tax bill.

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The QCD also increases tax benefits. When income is lower, more deductions and other tax benefits are allowable, which lower the total tax. When I see a tax return that shows RMDs and a deduction for charity, I see someone missing a tax benefit and paying more tax than they should. Financial advisers should be looking at this the same way, and be proactive in encouraging clients who already give to charity to pay less tax with the QCD.

Maybe part of the problem is educating clients on the QCD benefit and helping them actually make the transfers from their IRA to the charities. It's not about making contributions just to get a tax break. These are contributions they are already making the old-fashioned way, by writing a check and taking a tax deduction.

Help clients do the direct QCD, and you'll cut their tax bill in ways that will amaze them. In several cases this year, we saw clients being able to deduct much more of their medical expenses because of the QCD. In one case, someone saved more than $1,900 on their Medicare premiums. In other cases, the QCD cut down or even eliminated the dreaded AMT (alternative minimum tax), which in turn increases certain deductions that would otherwise be lost to AMT, such as state income taxes, real estate taxes and work-related expenses. The QCD can increase the deduction for adviser investment fees, too.

(More: How to help millennials avoid big mistakes with their IRAs)

Excluding RMDs, to the extent of the QCD, will lower the overall tax bill when clients are losing tax benefits due to increased RMD income. RMDs continue for life, or until the IRA funds are used up, so this planning, once done, can save taxes year after year. Clients who make large contributions can use the QCD for amounts even greater than their RMD.

QCDs can be especially helpful when a client uses the standard deduction, where they receive no charitable deduction, even though they contribute to charity. They just don't contribute enough to exceed the standard deduction amount. By doing the QCD, they get the standard deduction plus the charitable benefit by being able to exclude that amount from RMD income.

Most clients with RMDs don't like that they are forced to take this money and pay the tax. Be a proactive problem solver. For clients with large RMDs, this has to be something that is looked at every year. Too much is being lost by not using QCDs.

If you see a tax return with RMDs and charitable deductions being claimed, let them know how much they might save by doing the QCD, and help them get it done. Their CPA will be impressed with you. CPAs are generally not mentioning this tax planning gem often enough. That's a missed opportunity.

(More: Now is the time to review and correct 1099-R tax forms)

Advisers need to help RMD clients change the way they give. The savings will benefit them every year. And if you do have clients using the QCD, make sure they tell their CPA. Currently, it's not being reported on the 1099-R and the exclusion from income can be lost if the CPA never learns about it.

Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group. He can be reached at irahelp.com.

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