Could someone explain tax advantages of charitable donations?

[donheff]

Here in Arizona, we have some very significant tax credits geared towards several types of charities. These are dollar for dollar tax credits that offset your state taxes owed. For example for certain foster care charities, a couple MFJ can contribute $1000 and get an offsetting state income tax credit of $1000. Now, obviously, the state doesn't allow you to deduct these contributions as that would be in effect double dipping. However, I'm not sure if that applies to federal deductions. I haven't looked into it since we just take the standard deduction. These charities generally take credit cards for the donation so if you use a card that gives you airline points or cash back, you can get at least some tiny net benefit I suppose.

If you wrote a QCD check from your IRA you could make money.

 

[teej1985]

If you wrote a QCD check from your IRA you could make money.

I highly doubt a QCD would qualify for the AZ tax credit.

 

[Sunset]

I highly doubt a QCD would qualify for the AZ tax credit.

I don't see why not, the form for claiming the contribution only requests information of:

date, charity code, name of charity , amount.

Along with identification info all tax forms have: name, SSN

They use the word "cash" , but that is probably so people don't claim the donation value of clothing and other items.

https://azdor.gov/forms/tax-credits-forms/credit-contributions-qualifying-charitable-organizations

 

[TheWizard]

A QCD does reduce your AGI, assuming that dollar amount would otherwise be part of your RMD.

So if you were in the situation where your AGI for 2023 put you $50 over one of the IRMAA thresholds for 2025, then doing a 2023 QCD of just $100 would save you considerably more than that by keeping you in a lower IRMAA tier.

But this can be tricky. You need to project your AGI for the current year accurately as well as the IRMAA thresholds for two years hence...

 

[audreyh1]

A QCD does reduce your AGI, assuming that dollar amount would otherwise be part of your RMD.

So if you were in the situation where your AGI for 2023 put you $50 over one of the IRMAA thresholds for 2025, then doing a 2023 QCD of just $100 would save you considerably more than that by keeping you in a lower IRMAA tier.

But this can be tricky. You need to project your AGI for the current year accurately as well as the IRMAA thresholds for two years hence...

Yes, as long as you hadn't already taken your RMD.

If you have already taken your RMD it's too late. It doesn't reduce your AGI after the fact.

 

[teej1985]

Yes, as long as you hadn't already taken your RMD.

If you have already taken your RMD it's too late. It doesn't reduce your AGI after the fact.

Hmm. You can only do a QCD for the purpose of reducing a RMD?

 

[RE2Boys]

Yes, as long as you hadn't already taken your RMD.

If you have already taken your RMD it's too late. It doesn't reduce your AGI after the fact.

One can take a QCD regardless of any RMD as long as one is over 70.5 years old and the total QCDs claimed in any tax year does not exceed $100K.


Note that you can take a QCD many years before you have RMDs from an IRA. You can not take a QCD from 401ks.

 

[OldShooter]

Yes. Prior to recent tax law changes, the start-of-elegibility dates for QCDs and RMDs were the same. This unfortunate decision caused people to conflate two totally independent programs and led to a lot of confusion.

QCDs don't care about RMDs and RMDs don't care about QCDs. The only place they sort of get together is that a QCD counts towards the RMD tally, just like any other distribution does.

 

[audreyh1]

Hmm. You can only do a QCD for the purpose of reducing a RMD?

No, once you turn 70 1/2 you can do QCDs any time up to the annual limit. They don’t add to your income, but they don’t reduce your current year income either unless you do QCDs as part of satisfying your RMD.

QCDs have to be sent directly from an IRA to the qualified charitable organization.

So say you’ve reached 73 and you have $40K RMD. If you withdraw the whole $40K then that all adds to your income for the year. If you decide later to do some QCDs, those won’t reduce the $40K that you already took out.

If you decide to withdraw $30K, and send $10K directly from the IRA to charity then your add to income is $30K, and you met your $40K RMD.

 

[Sunset]

^^^^^^^^ Great to learn from this discussion of QCD's how it affect RMD requirements.

Seems like a smart way to donate if a person is taking standard deduction all the time for income taxes.

 

[teej1985]

No, once you turn 70 1/2 you can do QCDs any time up to the annual limit. They don’t add to your income, but they don’t reduce your current year income either unless you do QCDs as part of satisfying your RMD.

QCDs have to be sent directly from an IRA to the qualified charitable organization.

So say you’ve reached 73 and you have $40K RMD. If you withdraw the whole $40K then that all adds to your income for the year. If you decide later to do some QCDs, those won’t reduce the $40K that you already took out.

If you decide to withdraw $30K, and send $10K directly from the IRA to charity then your add to income is $30K, and you met your $40K RMD.

Seems like people should not be proactive with their RMDs then - wait until the end of the year when you better know your tax situation

 

[OldShooter]

Seems like people should not be proactive with their RMDs then - wait until the end of the year when you better know your tax situation

Standard caution applies: Do not let the tax tail wag the investment dog.

If you delay the RMD and plan to sell equities to generate the cash, then you are betting that the market will be flat or up during the year. To avoid making that bet (if you prefer), sell the equities at the beginning of the year and hold the cash in an MM or other short-term parking place until you need it.

 

[RetiredHappy]

Standard caution applies: Do not let the tax tail wag the investment dog.

If you delay the RMD and plan to sell equities to generate the cash, then you are betting that the market will be flat or up during the year. To avoid making that bet (if you prefer), sell the equities at the beginning of the year and hold the cash in an MM or other short-term parking place until you need it.

Ah, but the eternal optimist in me says that since stock market usually moves up, selling at the end of the year will have more gain.

 

[OldShooter]

Ah, but the eternal optimist in me says that since stock market usually moves up, selling at the end of the year will have more gain.

Me, too. But not everyone likes that gamble.

 

[audreyh1]

^^^^^^^^ Great to learn from this discussion of QCD's how it affect RMD requirements.

Seems like a smart way to donate if a person is taking standard deduction all the time for income taxes.

Yes, it’s a smart way to reduce income as well as avoid Schedule A once someone is subject to RMD.