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A Tax Efficient Way for Seniors to Fulfill Their Pledge to Epiphany

January 04, 2019 1:18 PM | Anonymous member (Administrator)

submitted by Ashley and Holly Stevens

With the recently enacted tax reform package, many more seniors will take the standard deduction and won’t itemize their deductions when filing their federal tax returns in 2018. The reasons for this are the coming together of two components of the tax reform package that the President signed into law on December 22, 2017.

The first of these components was raising the standard deduction for a married couple filing jointly from $12,700 to $24,000.

The second component was limiting state and local tax deductions to $10,000, well below the average $12,590 real estate tax bill in Winchester.

As a consequence, since most seniors have generally paid off their mortgages and hence have no mortgage interest deduction, and since only medical expenses that exceed 7.5% of Adjusted Gross Income (“AGI”) are deductible, unless a couple’s charitable giving exceeds around $14,000, putting their total itemized deductions over $24,000, they will be better off taking the standard deduction than by itemizing their deductions. As a result, they will not be able to take a tax deduction for their charitable giving, including their pledges to Epiphany.

However, there is still a way for seniors to make charitable donations, including fulfilling their Epiphany pledges, in a tax efficient way, with very little effort.

Once you pass 70½ years of age, you must take Required Minimum Distributions (“RMD’s”) from all your retirement accounts each year (apart from Roth IRA’s and apart from your current employer’s retirement plan if you are still working for that employer). The RMD starts at 3.649% of the value of your plans on December 31 of the year before you turn 70 and goes up each year after that. Most importantly, these RMD’s constitute taxable income to you.

However, you can take up to $100,000 of your RMD’s as Qualified Charitable Deductions (“QCD’s”). To make a QCD, you simply ask the Trustees of your plans to issue checks directly to the charities to which you wish to give – say Epiphany – for however much you chose to give. You can make as many QCD’s as you chose, to as many charities as you chose, as long as the total does not exceed $100,000 in any year. The Trustee will generally send the checks to you, made out to the individual charities, and you will then send the checks on to the charities of your choice, so that the charity knows that the money came from you and not, say, Merrill Lynch.

The big benefit to the donor is that the number of the QCD’s reduces their RMD by the same amount and hence reduces their taxable income by the total amount of their QCD’s. They therefore don’t pay any tax on the amount of their donations, whereas they would have paid tax on their donations were they to have made the donations by writing checks from their regular checking accounts.

The process is very simple. You simply write to your financial advisor or plan custodian identifying the amounts you wish to give, to whom you wish to give them, and when you wish the payments to be made. Every financial advisor and every plan custodian knows what a QCD is and can make a QCD for you. Allow a week or two for the advisor / plan to process your request – you may have to sign a form, either electronically or in person confirming your instructions, so don’t wait until December 28 to initiate a QCD. That’s it.

We only came on this idea in late summer in an article in Monday’s “Investing in Funds” section of the Wall Street Journal. We immediately realized what a benefit it would be for us and, among other charitable donations, we fulfilled our Epiphany pledge this year this way, plus we were able to add on our donation for the Chapel refurbishment, and we’ll certainly make all our charitable donations this way in the future.

We prepare our own taxes using TurboTax, so obviously, we haven’t filed our 2018 returns yet. If we discover any complexities in handling QCD’s in TurboTax, we’ll write a follow-up note for Three Crowns later in 2019.

Location & Contact

70 Church Street
Winchester, MA 01890
Phone: 781.729.1922



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