What’s A Qualified Charitable Deduction?
A Qualified Charitable Deduction is a great way to turn your excess RMD (required minimum distribution) into a tax-saving opportunity because it counts towards your required minimum, but doesn’t get taxed. In other words, if you have a traditional IRA, are over age 70 ½, and already plan on making a certain amount of charitable donations than a qualified charitable deduction is a no-brainer.
So how does it work?
Rather than taking the RMD, putting the money in your bank account, and then transferring it to the charity, you would just make the payment directly from your traditional IRA to the charity. Options on how to make this direct contribution may vary by custodian, but if you have the check writing option with Fidelity, for example, then that’s probably the easiest option. If that isn’t available to you, then most custodians like Fidelity and Vanguard will also have a form that you can fill out. Once you submit the form, the custodian will essentially write the check for you and either mail it to your house (which you can then forward to the charity) or will send it directly to the charity on your behalf.
Now some of you might be thinking – wait, I can already reduce my taxes by using the charitable donations deduction through itemized deductions on my tax return – so why wouldn’t I just do that rather than doing a qualified charitable deduction?
The simple answer is AGI – adjusted gross income. If you do a qualified charitable deduction rather than go the traditional route, then that portion of the RMD will not be counted toward your AGI, which could mean paying less in social security taxes or lower premiums on medicare (since some of them are based on AGI thresholds). Plus, many people qualify for itemized deductions because of the mortgage interest deduction, but most retirees have their mortgage paid off by retirement so they won’t get that deduction and therefore may be stuck with the standard deduction (as opposed to the itemized deduction).
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