Qualified IRA Distributions to Charities – Increased for Inflation in 2024

Looking to inflate your charitable contributions and deflate your taxable income?

IRA owners aged 70 ½ and older get a bump to the maximum Qualified Charitable Distribution (QCD) in 2024. Charitably minded individuals looking to satisfy Required Minimum Distribution requirements (RMDs), can now donate up to $105,000 to qualifying charitable organizations through a QCD in 2024 (up from $100,000 for 2023 and earlier). While the age at which account owners must begin taking RMDs has been increased to 73, the age at which QCDs are allowed remains at 70 ½.

The Rules are Simple

The funds must be transferred directly from your IRA custodian to the eligible charitable organization of your choice.

The Benefits are Great

The distributions are tax-free so you can satisfy your RMD and lower your taxable income all while making a charitable impact. QCDs are especially beneficial for taxpayers who are unable to itemize.

Since QCDs are not included in Adjusted Gross Income (AGI), they may help to maximize certain tax credits and deductions that can be phased out at higher AGI levels. QCDs may also help lower your Medicare premiums as these are also calculated based on AGI.

The $105,000 QCD limit for 2024 can be divided into smaller amounts and transferred to multiple organizations, or the entire amount can be transferred to a single organization.

Take Note

The $105,000 is per individual, so for a married couple where each spouse is age 70 ½ or older and each owns an IRA, each spouse can transfer $105,000 per year for a total of $210,000 per year.

One Final Thought

For those with IRAs who make a charitable impact annually through cash donations – keep in mind that the future inheritance of a traditional IRA to a loved one is taxable income to them. So why not make your donations through your IRA and save your tax-free cash to pass on to your loved ones!

If you have additional questions on QCDs, don’t hesitate to contact your tax professional at KT today!

March 19, 2024

Wrapping Up Charitable Giving this Holiday Season

As the saying goes, “Tis the season of giving.” Take note that the expanded tax benefits through charitable gifting put in motion by the CARES Act are set to expire at the end of 2021. These benefits were designed to help individuals and businesses give to charity due to the hardships brought on by the COVID pandemic.

Questions you might ask:

“Don’t I have to itemize to deduct charitable contributions?”

 No. Thanks to the CARES Act beginning in 2020, those who are unable to itemize are allowed an above-the-line deduction up to $300 for cash donations.

The good news — the amount has doubled to $600 for married individuals filing joint returns in 2021. The deduction remains at $300 for singles.

For taxpayers in the 12% tax bracket, this $600 deduction equates to a $72 tax savings. Although that may not make a huge difference in your tax bill, those who give for the sheer joy of giving year after year without a tax benefit will reap something more.

“If I itemize, is the deductibility of my charitable cash contributions still limited to adjusted gross income (AGI)?”

Yes. However, prior to the CARES Act the same cash contributions would have been limited to 60% of AGI.

Now through 2021, cash contributions to qualifying charitable organizations are deductible up to 100% of AGI. What exactly does this mean? For those who are able and inclined to do so, cash donations could fully offset their AGI to zero!

“What kind of cash contributions are non-qualifying for the 100% rule?”

Those made to supporting organizations (i.e., a charity that carries out its exempt purposes by supporting other exempt organizations), private foundations, charitable remainder trusts, to establish and maintain donor advised funds, and cash contributions carried forward from prior years.

Please note that cash donations to these organizations are “non-qualifying” in the sense that you do not qualify to take advantage of the expanded benefits expiring at the end of 2021 (i.e., the above-the-line deduction for non-itemizers and the deductibility up to 100% of AGI for itemizers. However, charitable donations to these organizations will follow prior deductibility regulations and AGI limits.

“Are there any benefits for charitable giving at the corporate level?”

Yes, C Corporation’s charitable gift deductibility has increased to 25% of taxable income (up from 10%).

What does that look like on paper? Assuming a C Corporation has $100,000 taxable income (21% tax rate) before qualified contributions, the 10% maximum prior to the CARES Act would have yielded a $2,100 tax savings. However, at 25% the tax savings would be an additional $3,150 for a total savings of $5,250 ($25,000 times 21%).

Speak with your tax professional at Ketel Thorstenson to see how charitable gifting could benefit you.

January 12, 2022

Increased Tax Savings with Dependent Care FSAS and Child and Dependent Care Credit

Does your employer offer a dependent care flexible spending account? If you are already making pre-tax contributions, you might consider increasing your contributions to the new annual limits signed into law by the American Rescue Plan Act in March 2021.

2021 Annual Contribution Limits

  • $5,250 for single taxpayers (up from $2,500)
  • $10,500 for married couples filing jointly (up from $5,000)

Why is this beneficial?

Pre-tax contributions lower your taxable income reducing your Federal Income Tax. In addition, these contributions also avoid the 7.65% Social Security and Medicare tax.

For example, a married filing joint couple in the 22% tax bracket, making max FSA contributions of $10,500 would have a total tax savings of $3,113 or 29.65% ($10,500 x 22% + 7.65%).

What if I am unable to use all of my 2020 & 2021 contributions?

Prior to the 2020 COVID pandemic, dependent care FSA contributions were typically “use it or lose it” in the year contributed. However, IRS Notice 2021-26 clarifies that an employer can modify their FSA plans to allow unused funds from 2020 to roll over into 2021, and 2021 funds into 2022.

What’s more unused amounts carried over from a prior year or available during an extended grace period won’t be taken into account in determining the annual contribution limit for the following year.

In addition to dependent care FSAs, the American Rescue Plan Act has modified the child and dependent care credit with the taxpayer in mind. Prior to 2021, the child and dependent care credit was most advantageous for the lower income taxpayer due to the credit percentage quickly decreasing from a max 35% to 20% starting at an adjusted gross income (AGI) of $15,000.

What’s new with the child and dependent care credit?

  • Qualifying expenses increased to $8,000 for one child (was $3,000) and $16,000 for two or more (was $6,000)
  • Maximum credit is now 50% (was 35%)
  • Credit reduction now begins at an AGI of $125,000!
  • Credit is now refundable.

Dollar for dollar, this credit is huge. In a pre-COVID world, it was not hard to incur annual childcare expenses of $8,000. For 2021, a single taxpayer or working couple with an AGI less than $125,000 who spends $8,000 in childcare expenses will receive a $4,000 tax credit! In addition, now any amount of the credit above your tax liability is not lost; it’s refunded.

One thing to keep in mind is that dependent care FSA contributions cannot be used for the child and dependent care credit.

As with anything in life, planning is key. Speak with your tax professional at Ketel Thorstenson today to see which of these tax law changes could benefit you most.

June 28, 2021