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Qualified Charitable Distribution

What You Need to Know About the CARES Act

By | 2020, Newsletter | No Comments

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES) stimulus bill was passed. It will provide relief and assistance to millions of Americans affected by the pandemic. This article will highlight some of the most important parts of the recently passed bill.

No Required Minimum Distributions for 2020

This year you will not have to take a required minimum distribution (RMD) from your qualified retirement accounts. The waiver for this year also includes any inherited IRAs or 401ks. RMDs are calculated based on your account value on December 31st of the previous year. Last year was a great year for the stock market, meaning your 2020 RMD was based on your account value at the end of a great year when the Dow was around 28,000.

With the recent events due to COVID-19, the market has taken a tumble, and you would now be forced to take money out at a low point, which is the opposite of what you want to do when investing. No RMDs in 2020 can end up being helpful for many retirees and could save them money on their taxes this year.

If you already took your RMD for this year, you won’t benefit from the waiver, but there is a bright side. You probably took your distribution when the market was at a high point, and that is a good thing.

We know many of our clients also like to take advantage of qualified charitable distributions to donate their required distributions from their IRA to a charity, tax-free. If you are over age 70 ½, you can still do that this year and it may still be advantageous for you to donate money from your IRA to a charity. This year, since you won’t be required to take money out, it will require more evaluation than in previous years to determine if it is still beneficial for you.

Payments to Individuals

Most individuals will receive a direct payment from the federal government. This is technically a refundable tax credit for 2020. It will be based on 2019 taxes (2018 if you haven’t filed yet). You must have a Social Security number and not qualify as a dependent of another individual.

The amount is $1,200 per adult plus $500 for each qualifying child under age 17. Rebates will be phased out for those with adjusted gross income above $75,000 ($150k if married filing jointly, $112k if filing as head of household). The rebate will be reduced by $5 for every $100 in income over the threshold.

Unemployment Benefits

Individuals will be eligible for an additional $600 weekly benefit through July 31, 2020. Additionally, individuals will have 13 weeks of federally funded benefits through 2020 for people who exhaust state benefits.

People who would not normally qualify for unemployment benefits like independent contractors, part-time workers, and self-employed individuals will be eligible for benefits.

Penalty-free Withdrawals from Retirement Accounts

The 10% early-distribution penalty tax that normally applies to distributions made before age 59 ½ is waived for distributions up to $100k relating to coronavirus. While you’ll still have to pay income tax on any withdrawal, you’ll be able to spread the payment of those taxes over three years. If you decide to repay the withdrawal back into your account within three years, you will not owe income tax, and it will not be counted toward yearly contribution limits.

*Remember to speak to your financial advisor before deciding to tap into your retirement account.

No Charitable Contribution Limits for 2020

For those who itemize deductions, this act suspends charitable contribution limits for 2020. To benefit from this, you need to donate to a qualified charity and not a donor-advised fund. Usually, deductible contributions are capped at 60% of your adjusted gross income, but the new bill allows you to deduct 100% of the contribution.

Student Loans

If you have a student loan held by the federal government, you will automatically get a six-month payment suspension (ends September 30, 2020), and interest will not accrue during that time.

If you have any questions about how this stimulus bill will affect you, please reach out to us, and we will be happy to help you!

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A Neglected Tax-Saving Strategy: Qualified Charitable Distributions

By | 2020, Money Moxie, Newsletter | No Comments

There are two types of people who complain about paying taxes, men and women. We all recognize the importance of taxes, but Gerald Barzan said it best, “Taxation with representation ain’t so hot either.” Yes, tax evasion is illegal, but tax avoidance…that’s wisdom. Tax avoidance should also be a financial advisor’s specialty. This is precisely why I’m so surprised by the number of financial and tax professionals who are unfamiliar with, or do not utilize, the Qualified Charitable Distribution.

The Qualified Charitable Distribution, or QCD, is a powerful tax savings strategy available to individuals age 70.5 and older who donate to 501(c)(3) organizations. Examples of 501(c)(3) organizations include religious, educational, and scientific organizations, public charities, and private foundations.

When you take a distribution from a tax-deferred retirement account, the distribution will be taxed at your marginal tax rate. However, if the distribution is from an Individual Retirement Account (IRA) and is sent directly to a 501(c)(3) organization, it qualifies as a QCD and becomes tax-free.

For example, Elliott has a required minimum distribution from her IRA of $3,000. Her tax rate is 20% federal and 5% state. Elliott plans to donate $3,000 to a 501(c)(3) organization this year. If Elliott takes the $3,000 distribution and pays the tax, she’ll receive $2,250 from her IRA. When she makes her $3,000 donation, she will be $750 short.

However, Elliott has a wise financial advisor who tells her about the QCD. So, she sends her $3,000 IRA distribution directly to the charity, and Elliott doesn’t pay tax on the distribution at all. Elliott’s required minimum distribution is satisfied for the year, she donates the desired $3,000 to charity, and her wise financial advisor saved her $750 in taxes.

Every year, we educate financial and tax professionals regarding the QCD and how to report it on the form 1040. Too often, we see it reported incorrectly. If you make a QCD and do not report it accurately, you won’t receive the benefit. If Elliott or her CPA doesn’t understand how to report her $3,000 QCD, she’ll pay an extra $750 to the IRS, and the QCD won’t save her anything.

On tax form 1040, line 4a asks for “IRA distributions,” and line 4b asks for the “taxable amount” as shown below.

Elliott took a $3,000 distribution from her IRA and will write $3,000 on line 4a. She will then subtract her QCD amount from 4a and write the balance on line 4b. In Elliott’s case, she will write $0 on line 4b, and no tax will be due from her IRA distribution. A tax penny saved is a tax-free penny earned.

Please help us get the word out regarding the Qualified Charitable Distribution. If you, your CPA, or your friends have questions about QCDs or other tax-saving strategies, please contact us. Tax planning is our specialty, and tax avoidance is the goal.

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2017 Tax Update

By | 2017, Money Moxie, Newsletter | No Comments

2017 Tax Deadline: April 18th
For you procrastinators, there is some good news regarding taxes this year: the tax filing deadline has been moved back to April 18th because the 15th falls on a Saturday and Monday the 17th is a holiday in the District of Columbia. However, you should not wait until the bitter end.

Even if you have to pay, we recommend submitting your return a week in advance just to avoid any possible issues. If you are due a refund, why wait? Get your money now! If you have more questions about tax brackets or other important numbers, please check out our website.

IRA/Roth IRA Contributions
Don’t rob from your future self. Make a payment to your future security. As with taxes, you also have until April 18th to make contributions into your IRA or Roth IRA. (But don’t wait that long or you risk missing the deadline!) Remember that IRA contributions lower your current taxes. They make sense if you are in a high tax bracket now and you will be in a lower one at retirement.

Roth contributions do not lower your current taxes, but they do grow tax free. If you are currently in a low tax bracket and will be in a higher one at retirement, or if you are a long way from retirement, then Roth contributions may be the best option for you.

You can contribute $5,500 total per person to an IRA or Roth. If you are over age 50, you can make a catch-up contribution of $1,000 for a total of $6,500 per year.

If you are eligible for a 401(k) through work and if your income exceeds a certain amount, your ability to deduct IRA contributions or make Roth contributions may be limited. Please consult with your CPA or check out our website to get more information regarding the phase-out limits.

Tax Forms
All of the tax forms have been mailed out, including the delayed tax reporting on non-retirement accounts. We are sorry (especially to the accountants) that the IRS has allowed delays in order for reporting companies to provide more accurate information.

If you still haven’t seen your tax forms, log in to your myStreetscape account and download the forms under the documents section. If you do not have a login, go to www.mystreetscape.com and click “register.” Then follow the prompts to create an account. You can use the same myStreetscape login to go paperless for the future.

In April, myStreetscape is being renamed to Wealthscape. You will be able to use the same login credentials after the transition.

Qualified Charitable Distributions
We’ve had several questions, from clients and accountants, regarding Qualified Charitable Distributions (QCD) that were sent directly to charities.
A quick recap: If you are over 70 ½ years old, a QCD allows you to donate part or all of your Required Minimum Distribution (RMD) to a charity and avoid paying tax on it.

The 1099-R’s sent by National Financial Services (NFS) show the total amount of distributions and are not reduced by the amount of the QCD. So, the tax preparer should reduce the amount reported on the 1099 by the amount of the QCD to come up with the taxable amount of IRA distributions.

The QCD should NOT be included as an itemized deduction. The potential benefit of the QCD is to remove the IRA distribution from your income, which may lessen the amount of Social Security subject to tax or help you avoid Alternative Minimum Tax (AMT). Smedley Financial does not give tax advice. Please consult a qualified CPA to get additional detail.

Source: http://www.smedleyfinancial.com/financial/2017-key-numbers.php. Tax advice is not provided by Securities America representatives; therefore it is important to coordinate with your tax advisor regarding your specific situation.

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Important Tax Information for 2016

By | 2016, Newsletter | No Comments

Qualified Charitable Distributions (QCDs):
On December 18, 2015, the President signed a law which includes a permanent extension of QCDs. This is great news for clients who wish to have their Required Minimum Distribution go directly to a qualifying charitable organization. Contact us at 801-355-8888 for more information and specific guidelines.

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IRA Charitable Donations Are Back…and This Time They Are Here to Stay!

By | 2016, Money Moxie | No Comments

For those of you over age 70 ½, a very beneficial tax law is back on the books thanks to the Protecting Americans from Tax Hikes (PATH) act signed into law on December 18, 2015.

The PATH act has a provision that allows you to donate IRA money directly to a qualifying charity and avoid paying any tax on the distribution. Even better, the distribution still counts toward your Required Minimum Distribution. Officially it is called a Qualified Charitable Distribution or QCD. Those who took advantage of it in previous years will be glad it is back.

Even better, the PATH act is now permanent. In the past, Congress has only approved the measure in 1- or 2-year increments, which has made it difficult to plan for the future.

Some people have wondered what the difference is between making a QCD directly to a charity or taking the money and then donating it to the charity personally. The main difference is that a QCD does not increase your income on your tax return (AGI). This may not sound like a big deal, but the implications can be large.

By not increasing your income you may reduce or possibly avoid paying taxes on Social Security. Also, if your income is lower, you may avoid paying the Alternative Minimum Tax (AMT).

To explore this in detail let’s look at an example. Let’s say Henry wants to get the money first and then donate it to a charity. If his required minimum distribution was $10,000 and he withheld $2,000 for taxes, he would get a check for $8,000. Henry would then deposit that check in his checking account and write out a personal check to the charity.

Next year Henry would get to include the $8,000 (not the full $10,000) as a deduction on his taxes. However, his income (AGI) will still be higher by $10,000, which may result in his Social Security being subject to higher taxes and/or his deductions being limited by AMT.

The other option is for Henry to donate the $10,000 directly to a charity. His income (AGI) isn’t increased and he doesn’t have to pay any taxes on the distribution. Also his charity is benefited by the full $10,000. That is an additional $2,000 to charity at no extra cost to Henry! The decision seems to be fairly easy.

If you plan to donate money to a charity and you have to take a Required Minimum Distribution, give us a call so we can help you take full advantage of this reinstated tax law.
Source: http://www.wsj.com/articles/congress-gives-americans-a-tax-gift-for-christmas-1450434600.
Smedley Financial and its advisors do not provide personal tax advice. It is important to coordinate with your tax advisor regarding your situation.

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