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How Can Qualified Charitable Donations Minimize Taxes?

Bernicke Wealth Management advisors are frequently asked, “How can I minimize taxes in retirement?”

There are few, if any, one-size-fits-all answers. However, a few strategies might make sense for some investors, including Qualified Charitable Donations (QCD).

Qualified Charitable Donation Strategy

This strategy might be advantageous for investors who are Required Minimum Distribution (RMD) age. A QCD allows individuals subject to RMDs to donate funds from a taxable IRA to charity, which will help satisfy their RMD.

RMDs are typically taxable at ordinary income tax rates. However, if a portion of the RMD is gifted to a charity, the investor may deduct the qualified contribution from their adjusted gross income.

Many retirees frequently make donations to their church or favorite local charity through cash donations or writing a check from their bank account.

If those same retirees were to make these donations directly from their IRA account, they might be able to reduce their tax burden.

Hypothetical Example

For example, a couple gives $5,000 annually to their local church. The wife has a $5,000 annual RMD, and the husband has a $10,000 annual RMD.

Hypothetically, if this couple is in the 10% federal tax bracket and takes their RMD and deposits the funds into their bank account, this could cost the couple up to $1,500 in federal taxes. The couple would still write out a check to their church for $5,000 in charitable giving.

Conversely, if they decided to donate directly to the church from the wife’s IRA account, her RMD would be satisfied for the year, and no taxes would need to be withheld from the $5,000 distribution, saving the client $500 in federal taxes.

Not only are there potential tax savings benefits for QCD, but the time savings with one donation from the IRA account versus writing multiple smaller checks to a charity or numerous charities may also be a benefit. The QCDs offer a way to potentially reduce adjusted gross income without itemizing standard deductions, which may result in a lower tax bracket or lower tax amount owed on other retirement income like Social Security. Many investors do not realize the value of adding up their annual donations to determine the potential tax savings if they utilize the QCD strategy. The math is simple, and the tax savings are a plus.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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