As the year begins its close, traditions start to appear. From the silverware for feasts, to the tacky lawn decorations the kids love, to the choice of holiday movies, traditions remind us of who we are. There’s a story behind almost every detail, whether it’s grandma’s antique table runner or your secret family recipe for cranberry sauce, and everything is intentional, or at least seems that way.
This is a great time of year to take stock not only of what we have, but who we are – and who we want to be. Our financial lives play an important role in this reflection.
Giving back often comes to mind for so many of us this time of year. Financially, most nonprofits rely on the fourth quarter to make the ends finally meet. Over one third of donations come in within those last few months, and 10 percent of annual giving happens in the last three days of the year! About 75 percent of the funding for nonprofits comes from private individuals, beating out foundations and government aid hands down.
“Gratitude makes sense of your past, brings peace for today, and creates a vision for tomorrow,” wrote best-selling self-help author Melody Beattie. In this time of traditions and increased awareness of who we are, it’s no surprise that giving is indicative of the season.
Let’s look at two important things to keep in mind this year as we start getting the decorations out of the closet.
RMDs to QCDs – Some Helpful Initials
If you’re of retirement age, you’ve probably come across the reality of required minimum distributions (RMDs) from your IRA after age 70 ½. Every year, no matter what, there’s a certain amount of money that has to come out from your IRA – whether you do this once a quarter, a month, or annually.
The driving motivation behind RMDs is, of course, taxes. If the government couldn’t get the taxes from your money while it was going in, or while it was gathering interest, then they’ll want their slice of the pie when the money is withdrawn. Thus, these are required for anyone of certain age with an IRA, and become part of your yearly income and therefore of your tax footprint for that year.
When it comes to holiday charitable giving, QCDs – Qualified Charitable Distributions – are an important work-around to know in this case. By distributing directly to a QCD, the donation is tax-exempt and therefore not part of your tax liability for that year. So, if Jane Doe turns 70 ½ and decides to donate her $10,000 RMD to charity she could take the $10,000 herself, pay the tax due on the distribution and then give the charity the net. If Jane owes 20% for taxes the charity gets $8,000. Or she could do a QCD and send the whole $10,000 directly to the charity. No taxes due for Jane! It takes some figuring, but it’s worth the time to work it out.
There are regulations for how to donate your RMD directly to a QCD. A few of the major ones:
- There is a cap of $100,000 per year
- IRAs only (Traditional, roll over, Roth, or SEP and Simple, if you are no longer receiving employer contributions). Employer-sponsored plans don’t qualify.
- The QCD distribution must go directly to the charity, it can’t go to you first, and all of the QCD distribution must go to the charity.
- The charity or nonprofit must be public as described by the IRS, private foundations/entities (i.e. “My Nephew’s Overdue Student Loan Fund”) won’t work.
- Churches, mosques, synagogues and other religious organizations are also qualified.
For the amount of tax benefit possible, the regulations are remarkably few and simple. This gives you a chance to distribute the money you’ve earned and kept to a cause that means the most to you.
Tax Reform – Give a “Bunch”
The Tax Cuts and Jobs Act of 2017 brought some of the biggest changes to taxes in the US in decades. Changes were felt from the economic “one percent” to the minimum wage worker, and the relationship of taxes to charitable giving was also affected.
Most relevant to our discussion here, the standard deduction for a married couple was set at $24,000 a year, which changes things for the majority of the population. Let’s say if John Q Public wants to deduct $8,000 for mortgage interest, $8,000 for state and local taxes, and $6,000 for holiday charitable giving. That brings a total of $22,000 which is lower than the standard deduction, so he might as well take the deduction instead of itemizing.
“Bunching” is a great workaround for this issue, and can bring you a lot more tax savings. Let’s say Mr. Public knows that he will be giving $6,000 every year in holiday charitable giving. He has enough assets on hand to be able to “bunch” that giving for the next three years into just one year, which brings his charitable giving to $18,000. That would bring his grand total to $34,000, which puts him well above the standard deduction ($24,000) and will give him substantially more tax savings if he itemizes.
High net worth households should continue to itemize as this will bring about the highest benefit. “Bunching” for these investors may also be helpful, but this is an important discussion to have with your advisor on the individual details.
Pass the Turkey!
The holidays are a time when we slow down and check in with our own hearts about who we are and who we want to be. Giving to a cause or organization that you believe in is one of the best ways express this – to yourself and to the world.
The taxes and other issues surrounding giving can be complex, but are worth the time and attention it takes to do things right. Get in touch with your advisor today to make sure you’re receiving (and giving!) in the best way possible.