Jadranko Tomic Bobas, J.D., Managing Hotline Attorney at Elder Law of Michigan
Being eligible to use senior citizen discounts is like a rite of passage in life. It says, ‘You’ve made it!’ Be proud of your age and take your senior citizen discount at McDonald’s for coffee, get cheaper movie tickets and even ask for savings from many cell phone companies. And now the US government has joined the list of organizations offering a senior citizen discount for taxes. What? Really, you say? Yup, it’s true!
We are referring to Qualified Charitable Distributions (QCD). Congress allowed QCDs temporarily from 2006 until making it a permanent law with the Path Act of 2015. This law states that when you are eligible, donations to qualified 501(c)(3) charities are fully tax-free if done through a specific process. That’s a senior citizen discount that not only benefits you but also your favorite non-profit organization.
There are multiple requirements that make you and the donation eligible for this senior citizen discount.
- You need to be age 70 ½ or older
- The distribution is taken from IRA type monies that haven’t been taxed yet
- The custodian of your account must write the check directly to the charity, so it is considered a third-party distribution, and
- You are allowed up to $100,000 per year per person.
In IRS terms, a QCD is a reduction in your taxable income, meaning the IRS doesn’t recognize that distribution as a taxable event. Let’s see how this can potentially help hypothetical clients John and Ellen.
John and Ellen have both reached the magic age of 70 ½ where the IRS requires them to distribute a portion of their Pre-Tax IRAs and pay taxes on these distributions. This is called Required Minimum Distribution (RMD). Together they have to take a distribution of $50,000 for this year and they are in the 15% tax bracket. John and Ellen receive pensions and Social Security, so they don’t depend on their RMD to meet monthly expenses. They also, on average, donate $10,000 to their church and several other charities.
Here is a possible plan for John and Ellen:
- First, using the QCD law, distribute their $10,000 donation from their IRA directly to their respective charities
- Then, distribute the remaining $40,000, withholding Federal taxes of $6,000 (15%) and they receive $34,000 in their pocket. Depending on their state law, they might also need to withhold State taxes.
How does this plan benefit them?
- The two distributions accomplish their RMD for the year in full
- Their monthly expenses are reduced since their donations are being paid by the QCD giving them the freedom to do other things
- Using the QCD law means their $10,000 distribution/donation is not recognized as income and therefore is not taxed, which is a greater benefit than claiming donations on their Schedule A Itemized Deductions, if they even file that form with their taxes
- Depending on the rest of their tax situation, there could be more benefits for them by reducing their income
- Charities are happy to receive lump sum donations as it helps them to plan better for their annual needs for the people they serve.
Sounds intriguing, right? Being creative with the logistics of your finances can certainly give you long-term benefits. As Financial Advisors, we want to make sure you are using all of the tools in your toolbox to meet your life objectives. This tool, your senior citizen discount for taxes, could be a really great strategy for you.
If you’re not 70½ yet, pass this important tax saving information forward to your parents or grandparents. Or if you are involved in the fundraising of a non-profit organization, we could guide you in crafting language to encourage donors to use QCDs to save on taxes, which in turn could increase giving.
We encourage you to consider this meaningful tool for your Required Minimum Distribution, cash flow, taxes, and donation planning. Your next step is to call/email Equanimity Wealth Management because there are a few other important logistics that need to be discussed before implementing financial decisions. We look forward to helping you use your senior citizen discount for taxes.
**The information in this material is not intended as tax advice. Please consult a tax professional for specific information regarding your individual situation.
Securities and Retirement Plan Consulting Program advisory services offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera Advisor Networks LLC is under separate ownership from any other named entity.
The information in this article is general and not intended to be a substitute for legal advice. In any legal matter you should always consider consulting with an attorney for specific advice.