Can Qualified Charitable Distributions Apply to RMDs?

Qualified charitable distributions
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You can save on taxes with qualified charitable distributions.

Few people look forward to any portion of their income ending up in the hands of the government.

Even if they cannot keep and use all of their funds for themselves and loved ones, many people prefer to have a say in how the funds are used.

If you want to minimize your taxes and support a charitable cause or organization closer to your heart than the IRS, then maximizing qualified charitable distributions may be just the E Ticket.

According to a recent The Washington Post article titled “A tax break for retirees is back. Here’s how to use it–and what to avoid,” the popularity of this tax planning tool first arose in 2017.

Qualified charitable distributions can save you on taxes.
You are responsible for recording your qualified charitable distributions for the IRS.

The tax law changed and subsequently reduced those taking itemized deductions from 31 percent to 11 percent.

If you have saved for retirement, you are likely familiar with “deferred-contribution” accounts.

These include IRAs, 401(k)s, and 403(b)s.

Essentially, you can put tax-deductible money into these account and avoid making taxable withdraws until you reach age 72.

At this time, you must take taxable required minimum distributions.

Your required minimum distribution is calculated based on the account balance at the end of the tax year.

Using qualified charitable distributions can minimize the tax impact of having to make these withdrawals from your IRAs.

Although required minimum distributions were canceled in 2020 as part of the CARES Act, they will be back in 2021.

You can make a qualified charitable distribution from your IRA account directly to the charity.

This means the IRA administrator must cut the check directly to the charity .

Note: Neither 401(k)s nor 403(b)s are not eligible for qualified charitable distributions and contributions cannot be made to a donor-advised fund.

What other things should you consider when making qualified charitable distributions?

Tracking your distributions is your responsibility.

Do not assume the custodian for the IRA will do this on your behalf.

Although the retirement plan will send a 1099-Rs form to the IRS to show your total distributions, you or your tax preparer will need to subtract the qualified charitable distributions from your 1099-R.

Be aware of other changes made by the SECURE Act.

One alteration is individuals age 70½ and older can continue making contributions to their IRAs if they are working.

If you choose to make contributions to the account and take qualified charitable contributions from the account, the amount you can deduct will be reduced.

If you are self-employed, you can set up a SEP-IRA.

If you do this, you cannot make a qualified charitable distribution for the same year you claim an income tax deduction.

When it comes to tax planning, qualified charitable distributions can decrease your tax liability when following the federal guidelines.

Yes, navigating these streams regarding retirement funds can be tricky.

Make sure you get professional advice to help steer clear of the boulders lurking just below the surface.

Reference: The Washington Post (March 18, 2021) “A tax break for retirees is back. Here’s how to use it–and what to avoid”

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