Ep. 58 | Qualified Charitable Distributions
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Speaker 2:Welcome back to the Teaching Tax School podcast, everybody. Today on episode 58, we are gonna dive head first into what exactly is a QCD. So that's a qualified charitable contribution, a QCD. We're getting towards the end of the year, so stop wasting time. Let's jump into it.
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Speaker 2:Hey, everyone, and welcome back to the teaching tax flow podcast, TTF. If you haven't referred to that yet, now you have teaching tax flow TTF, see how that goes together. Chris Mercuro, welcome back to the show, my man. How are we doing?
Speaker 4:I'm doing amazing, John. First of all, happy Thanksgiving to you and all of our listeners and everyone in the Teaching Tax Flow community. We truly appreciate you.
Speaker 2:Excellent. Well, while I'll save the audience the, my sound effects of trying to do a turkey gobble, but we are whether we like it or not, we are creeping up on another calendar year here in what do we got? Five and a quarter weeks, six weeks or so. And great time to talk about donations, but the topic specifically today is qualified charitable distributions, QCDs, if, you know, we we love our acronyms. So there's your there's your QCD.
Speaker 2:And, Chris, let's let's just jump right into this and walk people through how this actually affects and is part of a really is part of a tax strategy for the most part because we're not just talking about, you know, oh, I'm a I'm a charitable individual. I love going to Goodwill and giving them bags of clothes. This is completely different. So maybe give us the highest of high level overviews on what exactly these QCDs are, and then we'll we'll obviously jump into a lot of details.
Speaker 4:First of all, I'm disappointed, John. I thought you're gonna sing, you know, I was down with QCD. Yeah. You know me. Remember that old rap song?
Speaker 4:I I have for a side note, I've been to three Naughty by Nature concerts in my life. I know. She's down OPP. But we'll go in. Your first Swifty is about a month or so ago, John.
Speaker 4:You were you were you were outed as a Swifty. My 13 year old daughter found a comical, but now I'm outed as a hip hop and eighties, nineties rec person.
Speaker 2:Hey. It's all good. My wife just went to a I Love the nineties concert last Friday, so I don't I didn't really ask her how it went too much. You know? It's funny because this podcast, I feel like I feel like we've put so much of ourselves into it.
Speaker 2:Right? Like, here I am, you you getting it out there to the masses that actually listen to Taylor Swift every once in a while. I think I outed myself that I'm a Nickelback fan. So any of our any of our Canadian, listeners, I know you appreciate that more than a lot of us do on this side of the, of the American border, but regardless of the fact. So Well, John we are talking about charitable One more
Speaker 4:thing, and we'll be in that QCD. With QCDs. Where's my view? One of the listeners, if you go in the dark web, you will find a picture of one John Schapolsky looking like a boy band superstar with his with his bleached steps. So Oh, it will be it.
Speaker 4:You know? It was Anyway, that is
Speaker 2:a hybrid. Let let's go ahead and clear the air on this one. Just talking about charity. I need a little charity here. So it was in my own defense, right, it was kind of a hybrid between, like, an Abercrombie and Fitch stage of my life and Eminem being popular.
Speaker 2:It was just a really bad blend of the two, but regardless, it happened. But you you you guys everybody that's listening here, please do not forget this very important comment that I still have more hair than Chris does. So there's there's my joke for the day. You can't bleach your hair, sir, but you do have better looks than 99% of
Speaker 4:the population. So Well, John, you being the Swifty, I don't wanna have back blood as you know. So let's, Oh, she did it. She did it on a QCD. Now they okay.
Speaker 4:So in the show, I think that's the most fun everyone anyone's ever had about talking about qualified charitable distributions. But in all reality, this is an amazing strategy as we roll into the end of the year for many people that are subject to something called required minimum distributions. Now taking a step back, we know that in our teaching tax flow community, we teach a lot of different tax strategies. One of them is is if you're a red diagnosis, meaning a high marginal tax rate, purple, which which means you're looking for tax deferral, is you might put money into a retirement account and did an immediate tax deduction, which is great. That money grows tax deferred, but at some time, sometime along the your road of life, Uncle Sam wants his peace.
Speaker 4:Remember, tax agencies are our involuntary business partner. So even though you may have accumulated a significant amount of money in your retirement accounts, specifically, we're gonna talk about PUAREs, which stands for individual retirement accounts, at some point in your life, the the government says or the IRS says, you need to take some of that, and that's gonna be taxable. Yes. You got a deduction for it a long time ago, but you're gonna pay tax on the entire amount today. So, John, let's say you took you know, know, we're gonna use an easy example, $5,000 and you put it into a traditional IRA back when you were bleaching your hair, like the new kids or whoever else was was popular today.
Speaker 4:That would be the last year, but at least they had a little more, you know, a little more gain. Right? There we go. That $5,000 became worth worth 20,000. Okay?
Speaker 4:And let's say let's say you're required to take that out of your retirement account. Now I'm going to pause there. We will call out required minimum distribution is, is an amount that's calculated based on whatever is in your retirement account values at the end of the year, multiplied by a factor that the government puts out based on your age, your life expectancy thing. So assume, let's say, you're 71 years old, and you have $200,000 in your you would have to take out approximately $12,000 This is just a roundabout figure. Okay?
Speaker 4:There are a lot of factors involved as far as beneficiaries and your age and life expectancy tables and what year you're born. Those things all changed also with the with the inflation reduction in. Another IHOO, another acronym, which should get paid by the acronym. Point is, at some point in my in the example of having to take out $12,000 that's all gonna be taxable. So let me go back to so I kinda used two examples there so that but, let's say you had let's say that $5,000 you put into an IRA became worth $20,000 And let's just say you had you were required to take out $20,000 of that money in the current year.
Speaker 4:Right? Well, in general, that's all gonna be taxable, and that becomes challenging for people that are at the age age pretty much 70 years older or older. That is challenging for people that have to take out required minimum distributions out of their account, because even if they don't need that money, they're forced to take it out and that's taxable. So if they take $20,000 out of their retirement accounts, even if they don't want it, that all becomes taxable. And now a portion of their social security might become taxable.
Speaker 4:Their Medicare insurance premiums that they're paying for might become higher based on their income. So the point is we have people out there that are forced to recognize income, you take money out of their retirement accounts that really don't need the money, and are paying tax on that money. So without the proper planning, they're forced to take these required minimum distributions out when they don't even need the money. Many of those people are very philanthropic. They donate money to their church, their synagogue, any type of nonprofit organization, in which is great.
Speaker 4:But with the tax cuts and jobs act of 2017, we know that the standard deduction increased greatly. So many of these folks, let's say they're donating $10,000 15 thousand dollars to a charity, they're married filing jointly, many of them don't get any type of tax deduction for that because they don't have a mortgage, they don't pay much in taxes, they're retired, so they just don't have a lot of those personal deductions.
Speaker 2:Hey, Chris, you had a couple good points here just to reiterate is that, you know, that I believe you refer to it as the required minimum distribution. That's not a flat rate. It's not the same for anybody. That's a calculated number based on situations, accounts, etcetera. And this what we're gonna get into a little bit more detail is really just a way to take advantage legally and ethically, obviously, but to reduce it reduce the taxes that you are going to pay on that distribution.
Speaker 2:So I'm I'm excited to get into this because I have all kinds of questions. And to be honest, I don't know a whole lot about this. So this is this is great information.
Speaker 4:Well, so that yeah. So let's dive into the situation we have, you know, uncle daddy Warbucks and and and auntie Warbucks. They have to take out $20,000. Let's assume they have to take out $20,000 out of their required minimum from the required minimum distribution. And let's assume they already donate about $15,000 to charity per year.
Speaker 4:Okay. Well, that $20,000 depending on what what their marginal tax rate is, could be significant. And we might say, well, gosh, you're only in the 12% tax bracket. Well, remember everyone, and if you don't remember, go back and listen to that episode, marginal tax rates different than tax bracket. They might be triggering a high tax based on or high, higher percentage of Social Security be taxable.
Speaker 4:Well, let's just assume they're going to pay a 25% tax on that on that distribution. So they take out $20,000 Right? They pay $5,000 with the tax, and they end up with $15,000 in their pocket. Well, if they like to donate $15,000 to cherries, they have actually end up with zero. Right?
Speaker 4:$50,000 goes to the charity. They might not be itemizing their deductions, and they end up with zero in their pocket, but $20 came out of their account. Well, if they decided to do a qualified charitable distribution, QCD, let's assume they meet all of their requirements. We are gonna talk about the requirements for a few minutes at the you know, in a couple minutes. What would happen is they would say, alright.
Speaker 4:I'm gonna take out of the $20,000 of required minimum distribution. We're gonna take $15,000 and send it right to the charity, charities, church, synagogue, etcetera, that they would like to assist, they would like to donate to. That means the remaining $5,000 goes into the debt, and they only pay tax on the $5,000 Well, if that tax rates $12.12 $50 they just reduce their tax burden by $3,750 They would have paid 5,000 on the distribution. Now they paid $12.50. So they paid 75% for the Absolutely.
Speaker 4:Absolutely. Yeah. So if you're so the point is is if you're taking required minimum distribution and you're currently donating to any type of charitable organization or church, you should deeply consider just doing the qualified charitable distribution. It's almost like you're you get out of paying the middle man. Right?
Speaker 4:The middle man's the government. Now more of your money can go to the charity. And and we know that again, many of these, that there's several things that are based on your adjusted gross income. I mean, there are people that are maturing, they're living in subsidized housing, that they can't have a certain amount of income. There's just so many factors that reducing your adjusted gross income would be helpful.
Speaker 4:So the qualified charitable distribution is a great option for you, for anyone that has has is it feels, benevolent. Let's put it that way.
Speaker 2:So hey, Chris. Really, really quick question too before we get too deep into it. So thinking back a little bit to previous podcasts we've done, conversations we've had, if anybody's listened to, everything we've referenced in the real estate investor world about ten thirty one exchanges. Right? Like, you can't just take this money.
Speaker 2:You personally move it into another property. Is that the same what we might be talking about here? Like, does there need to be somebody else involved, or can I literally, figuratively literally, take, say, $15,000, and I take $10,000 of that cash in my account and then give it as a donation? How how does the process work? Are there any requirements with that per se?
Speaker 4:Yeah. So that's a good point. You definitely want to talk to your financial adviser and and or wherever your account is held here. I write make sure the distribution, goes directly to an eligible charity. Because if it if it comes to you personally, and then you turn around and donate it, you have a taxable distribution, and then you your donation is might be tax deductible, but it might not be.
Speaker 4:So it's similar to, you know, we talk about ten thirty one exchanges where there's a qualified intermediary. You want that you want that you definitely want that distribution to go directly to the qualified or eligible organization. So that's a good segue. This is it's something that so when we talk about tax strategies and teaching tax law we talk about some are the strategies are basic, advanced, ultra advanced. I would say this one that borders on advanced meaning that you typically you could do it on your own but you need to use what would be called an implementation partner which is simply your financial advisor or or if you if you let's say you have an account that and that you self manage you just go to whoever your broker is and make sure that I'm sure there's a form when you do not distribution to designate that it's a QCD, and then I'm sure you would put in the information, about the charity.
Speaker 4:Most likely, they've the federal identification number, address, etcetera, etcetera. So that's a good segue into qualifications. You know, what are the what does I say are the rules to make a qualified charitable distribution? So here's some of the main rules. One, you have to be at least 70 and a half to do this.
Speaker 4:So we know that typically you can start taking distributions out of your, IRA, and you're 59 in the house. But you're really the this strategy is meant to alleviate the burden of a required minimum distribution. So at 70 years old, you could start to make QCDs. You could do up to a hundred thousand dollars per year of QCD. So believe it or not, there are people walking around out there with, you know, millions and millions of dollars in their face and back in the car is most of them don't need the money.
Speaker 4:So they but the government does want their tax, so they can't do 200,000. You know, they would And then for
Speaker 2:the 500,000. I measure at this per individual, not house Correct.
Speaker 4:Correct. Great point. So that's up to 200,000 on a married filing joint situation or anything married to married filing separately people. These QCDs, they have to be made from traditional IRAs. Unfortunately, they can't be made out of from employer sponsored plans at this time.
Speaker 4:And the donations that you touched on, they have to be made directly to the qualified charitable organization. So those are again, churches, nonprofits, schools, that means that that again, the money can never hit your personal bank account. Yeah. Now if for some reason you intended to do a QCD, and you took a distribution there are some rules as far as returning an IRA contribution I think it's sixty days or ninety this is the dangerous part of me doing this off the top of my head but there are rules of returning it and then executing the QCD so there there's sometimes some remedies. So we know that the QCD does count against your required minimum distributions and here's what's gonna happen.
Speaker 4:If you do a QCD, you'll still get what's called a form ten ninety nine R at the end of the year. That's simply the IRS form that reports each of your retirement plan distributions you will report that on your personal return but you will just simply you'll simply report, hey, I took 30 in my example, I took $20,000 out of my eye, dollars 15,000 of Flint Chewett as a QCD, and $5,000 is taxable. And you have to do that before the end of the year. So that's why we wanted to do this podcast about months and months or so left in the year. This is a time of year where many people that do have required green room distributions are trying to figure out, one, where what account they're gonna take their RMD from, and two, do they need the cash?
Speaker 4:Are they thinking about doing some year end planning with charitable contributions? So this is a perfect time for someone to think about a qualified, charitable distribution.
Speaker 2:Awesome. Awesome. And, Chris, you're touching a good point there too. Like, if if for whatever reason, the funds hit your account, you distribute them. It's not the end of the world in most cases, but you can avoid yourself a little bit of hassle, a little bit of headaches, and just going about it this way.
Speaker 2:Correct?
Speaker 4:You are correct. You are correct. Awesome. This is a great strategy. I know not you know, you might be thinking, well, gosh.
Speaker 4:Only people 70 years old who could benefit from the strategy. That might be true. But we have and and do we you know, is that are all of our listeners over 70 years old? Maybe not. But you might have, a parent, a grandparent.
Speaker 4:You might be your tax free. You have a lot of tax professionals listen to this. There's a way so you might know someone that is in this situation that might be a this QCD strategy might be of interest.
Speaker 2:Awesome. Awesome. Well, Chris, thanks for diving into this, and I'm sure this is actually a topic, a specific topic that's probably new to a lot of individuals. And it wasn't new to myself. I thought it was really what we talked about not doing.
Speaker 2:Right? You take take a distribution. You distribute it amongst, charitable organizations at your own will, your own leisure, and then report it back. So this was great to dive into this. And, also, Chris, as you mentioned too, it's kind of the, the giving season, if we will, that's coming up.
Speaker 2:As as anybody in the nonprofit world knows, this is an extremely busy time of year because it's usually when when fundraising kicks in. But on this topic, I mean, again, any questions, reach out to us. We're happy to dive into it with you. Hey, resources, we are here for that as well. So as I always like to close-up with one of the two responses, same time, same place, next week, we will see you back here on the Teaching Tax Flow podcast.
Speaker 2:There you go, folks. We did it. We dove into QCDs. So I know we're on fire this week with our nineties and a little bit eighties, a little bit of two thousands musical references. So I believe I'm taking this out of the, the lyrics from the late Biggie Smalls.
Speaker 2:If you don't know, now you know. On that note, everybody, if you have any questions, defeatingtaxes.com is the place. Drop us a line on there. That's the private Facebook group. Here's your personal invite.
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