Don't Mess With Taxes

Photo by Jon Tyson on Unsplash

Taxes are all about the numbers, and this past week I've been posting inflation-adjusted figures that apply to a variety of tax provisions.

Long-time readers know I parcel the numbers out in a 10-part series. But one of those posts, Part 3 on cost-of-living boosts in 2024 for tax-favored retirement savings plans, was published first because the Internal Revenue Service typically issues those adjustments first.

Since that earlier Part 3 post hasn't gotten a sequential mention during this recent run of inflation series posts, I'm boosting it today. And I'm pulling out an item from that post to highlight as today's By the Numbers figure.

That special number is $105,000. That's the bump in 2024 to the maximum qualified charitable distribution (QCD) amount.

QCD connection to required retirement withdrawals: A QCD is a way for older savers who've stashed a lot of retirement cash in tax-deferred plans to lessen the tax bite on some of those savings.

Specifically, a QCD is available for savings in a traditional IRA. 

RMDs start at age 72 or age 73, depending on whether you're affected by the Setting Every Community Up for Retirement Enhancement (SECURE) Act 1.0 of 2019 or its 2.0 version enacted at the end of 2022.

The reason for RMDs is simple. Uncle Sam has been waiting years, decades in most cases, to get his cut of your retirement savings that have been growing tax-deferred in traditional IRAs and 401(k)s. So when you get into your seventies, he demands (hence the required part of RMD) you take at least some from the affected accounts.

The exact RMD is calculated each year after you hit your starting age by using one of the IRS' life expectancy tables. They are found in Appendix B of IRS Publication 590-B. These tables are created for various lifestyle situations, but most people use the Uniform Lifetime Table, which the IRS updated in 2020. You also can use AARP's online RMD calculator to determine the amount you must withdraw.

Withdrawals from tax-deferred retirement accounts are taxed at ordinary tax rates, which now top out at 37 percent. Depending on how much you've saved, an RMD could be in the tens of thousands. Such a hefty chunk of change could bump you into a higher tax bracket, as well as increase your Medicare costs.

But if your RMD-mandated account is a traditional IRA and you don't need the required withdrawal to cover living expenses, you can use the money to make a QCD.

What about your tax-deferred 401(k) money? You can't make a QCD directly from that workplace retirement plan, but you can roll your 401(k) funds into an IRA and then make the QCD from that new tax-deferred account.

Tax savings for RMD donors: The key here is how the donation is completed.

With a QCD, you roll your RMD directly from your IRA to an IRS-qualified charity. Let me repeat that. You transfer your RMD directly from your IRA to an IRS-qualified charity.

Do not — again, I repeat, Do Not — take the RMD yourself and then donate it. The QCDs must be issued by the IRA trustee directly to the charity, either electronically or by check payable to the charity. 

An IRA distribution, such as an electronic payment made to the IRA owner, does not count as a QCD even if the owner then gives the full RMD amount to a charity. Likewise, a check made payable to the IRA owner and then transferred to a charity is not a QCD.

When properly transferred, the QCD amount meets your RMD for the year. But that amount of donated money, because you did not take possession of or have access to it, is excluded from your taxable income.

No, you don't get a charitable tax deduction. But you don't owe any tax on the donation. 

Overall, it's a win-win-win. Your chosen charity is happy. The IRS is happy that you followed the law, if not so happy about not getting any tax money. And you are happy about not owing tax.

QCD inflation bump: The base maximum QCD amount you can exclude from your gross income was set at $100,000 when the option was created by Congress as part of the Pension Protection Act of 2006. The SECURE Act 2.0 provided for QCD inflation indexing beginning in 2024. 

As noted at the start of this post, that means the QCD amount goes from the $100,000 base this year to $105,000 in 2024.

If you're married, filing a joint return, and your spouse also is facing an RMD from an IRA, the maximum QCD amounts of $100,000 in 2023 and $105,000 in 2024 apply to each of you separately. This special philanthropic option will let you exclude up to $200,000 this year and $210,000 next year from your joint income.

QCD delivery to charity process clarified Nov. 20, 2023.

You also might find these items of interest:

• 7 tax breaks for older taxpayers
• Social Security taxable wage base goes to $168,600 in 2024
• House bill proposes ending federal tax on Social Security benefits

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