Find tax savings when clients make charitable contributions

By William M. Upson, CLU, ChFC

As a professional who preserves my clients’ wealth, I do all I can to ensure that my clients receive the best possible tax benefits from their year-end charitable contributions. It allows clients to give more to organizations they care about as well as appreciate my value to them as their trusted financial advisor.

Here’s how this works for me in the United States. One of my retired clients, who is older than 70½ , received significant income from his prior business investments and real estate holdings. He donated more than $40,000 to his local charities every year by using his individual retirement account (IRA) distributions.

He didn’t realize, however, the amount of tax he was paying by taking the distributions was not automatically refunded by the income tax deduction. Essentially, he was being taxed to do good because the effective tax rate for his high retirement income was more than 40 percent per year in California, where he lives.

Provide tax solutions

There’s a remedy for this in the United States. It’s called qualified charitable distributions. Through the QCD concept, the Internal Revenue Service (IRS) permits IRA account owners to directly distribute the IRA required minimum distributions (RMD) to the charities of their choice as a “trustee-to-trustee transfer.” They still report the funds given to the charity on their individual 1040 income tax returns on Page 1 (it’s important to inform your tax preparer that you’ve done a QCD) but no income tax is due. In fact, they can use the QCD to gift up to $100,000 a year from their account and an equal amount from their spouse’s account, if they wish to do so.

When my client found out about this, he vowed to use it this year and increase the amount of his gifting by the amount of income taxes saved. Thereby, the charities that were meaningful to him received more because he could give more.

If, as in my case, a life insurance policy has been gifted to the charity prior to the time the QCD was begun, the yearly premium cost for the policy can also be funded to the charity from the QCD (if the charity so decides). This then multiplies the value of the total gift for charity (life policy plus the yearly QCD contribution).

How it works

In the United States for people reaching age 70½ holding IRAs, there’s an IRS requirement that the account owner must take RMDs yearly for the rest of their lives. They can take more than the minimum, but they must take at least the RMD. It’s calculated based on their age and the prior year-ending value of all their retirement accounts.

Other rules apply for having various other qualified retirement accounts, so check your individual situation. This issue needs to be clearly understood so that the example I provided doesn’t conflict with the distribution and tax issues of the individual’s situation. Please check with your individual income tax advisor for consideration of your circumstances and needs.

William M. Upson, CLU, ChFC, of Walnut Creek, California, has been an MDRT member since 1990 and is a Top of the Table qualifier. He’s the founder of Strategic Asset Management Group, which specializes in income and estate tax planning for high-net-worth individuals, successful professionals, business owners and retirees. You can reach him at bill@strategicasset.net.

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