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  • Pat Schultz

Can donating to charity really lower my tax bill?

A new couple moved into my neighborhood a few weeks ago. Vera and Paul are retired and decided it was time to move closer to their oldest daughter and her family.

I was talking to Vera the other day, one of those conversations you have in the driveway that starts as a simple hello and morphs into a much more in depth discussion. She mentioned that they were finally doing something they’ve dreamed about for years.

They’re taking their daughter, her husband and their two grandchildren to Italy for 10 days.

None of them have ever been to Italy, although they’ve talked about it off and on and even started making plans a couple times. But, like so many people, they’ve decided it’s time to stop putting it off and finally go.

Vera knows that I work in wealth management. During the conversation she mentioned reading an article about Qualified Charitable Distributions (QCDs) and how they can count toward satisfying your Required Minimum Distribution (RMD). I encouraged her to speak to her accountant since there are many factors to take into consideration, but I also told her it’s a strategy we often use with our clients.

I was able to give her some “back of the napkin” math to demonstrate how it could work.

Vera and Paul have always supported a couple charities that are important to them. Normally Vera writes multiple checks throughout the year.

Once you hit a certain age (72 for most folks) the IRS requires that you take an RMD from your IRA (link to IRS article). The amount you have to withdraw as an RMD varies based on the overall balance of the account(s) and your age.

Using a QCD, instead of writing checks to the charities and deducting the contributions on their taxes, they could send the funds directly from their IRA to the charities.

Let’s say Vera and Paul have a taxable income of $100k, and of that $21k is their RMD. That $100k in taxable income puts them in a 22% tax bracket, meaning they pay $22k per year in taxes on $100k in income.

Vera and Paul normally give about $20k to charity. If they use QCDs to make these donations it will account for the majority of their RMD. If they bump up their giving slightly this year, giving their full $21k RMD to charities as a QCD, it will allow them to automatically exclude the entire amount from their taxable income.

That reduces their overall taxable income from $100k to $79k, dropping them down to a 12% tax rate. The $22k they would have paid in taxes is now $9,480, a savings of over $12k! That’s a significant amount of money. If they continue this strategy for the next few years they’ll be able to pay for another trip to Italy!

Keep in mind that this is based on what I know a QCD can look like, not on actual numbers from Vera and Paul. What I do know is it can save a significant amount in taxes for some people.

Curious to see if QCD can save you some tax dollars? Click here to schedule an intro call.