– RMD (Required Minimum Distribution) – Mandatory distributions from an IRA beginning at age 72.
– QCD (Qualified Charitable Distribution) – Distributions made directly to a charity from your IRA after age 70 ½. These distributions are not taxed and count toward your RMD.
– Cost Basis – Original Purchase Price
After three long years, I finally got a chance to go back to my favorite conference. A week in Vegas with lots of glitz and glamor? Not even close. It was the AICPA’s Sophisticated Tax Conference in Washington, DC. (I admit I’m a little strange.) Two full days discussing complex tax strategy is my idea of a good time.
This tax conference covered it all—year-end tax planning, charitable giving strategies, the potential for a new tax bill topped off by IRS leadership discussing how the future would improve with an extra $80 billion in funding. The good (and bad) news is that not much has changed in the last year from a tax perspective, but the goal remains the same—pay as little as possible over time while still following the rules. Here are my biggest takeaways:
Charitable Gifting: Appreciated Stock & Qualified Charitable Distributions from IRAs are Better Than Cash
Appreciated Stock: For those under 70 ½, the best currency to fund charitable donations is appreciated stock. As long as you have held the stock for at least a year, you receive a tax deduction for the full fair market value of the stock and avoid paying capital gains tax on the appreciation.
Let’s look at a donor who wants to make a $15,000 gift to St. Jude. They have two assets to choose from: $15,000 cash in the bank or $15,000 of Apple stock they bought for $5,000. If they donate the cash, they receive a tax deduction for that amount. However, if they donate the Apple stock (as long as it has been held longer than a year), they receive a tax deduction for the $15,000 AND avoid $2,000 of capital gains tax ($15,000 value – $5,000 cost basis = $10,000 gain x 20% long term capital gains tax rate). They can then use the $15,000 of cash to either purchase new shares at a higher cost basis or diversify their portfolio.
Qualified Charitable Distributions from IRA
For those who are 70 ½ or older and do not itemize their deductions, using Qualified Charitable Distributions (QCDs) from your IRA to fund your charitable gifts is a must. The QCDs allow you to distribute up to $100,000 per year from your IRA directly to charity without recognizing the income. Additionally, the QCD counts toward your Required Minimum Distribution (RMD).
Assume you are married and have the same $15,000 of charitable intent as the example above. Your RMD is $35,000, your state taxes are $10,000, and the house is paid off. If you deposit the $35,000 in the bank and write a check to the charity for $15,000, you will recognize $35,000 of income from the IRA distribution. Since your itemized deductions are $20,000 (the $10,000 state taxes + $10,000 charitable deduction) and your 2022 standard deduction is $28,700, you receive more of a benefit if you do not itemize, and therefore receive no tax benefit from your contribution.
If you instead deposit $20,000 in the bank and send a $15,000 check directly issued from your IRA to the charity, you have still satisfied your $35,000 RMD. However, you then only have to report $10,000 of income from the distribution and can still take the same $28,700 standard deduction. In this scenario, your income is $15,000 lower for income taxes AND the calculation of Medicare premiums.
Taxpayers over 70 ½ can combine gifts of appreciated stock to avoid capital gains tax with QCD from their IRAs to allow for tax-free distributions from their IRAs. This works great for even those who do itemize their deductions.
No matter which strategy you decide on, remember that you must keep a receipt for charitable gifts of $250 or more. The receipt must include the date and value of the gift and declare that no goods or services were received. Failure to maintain these receipts can result in the charitable deduction being disallowed. This applies to gifts of cash, stock or QCD.
Is There a New Tax Bill Coming Soon?
Historical precedence suggests that the party that is not in the White House picks up Congressional seats during midterm elections (the same ones that are happening this week). If history rings true, and Republicans do gain control of the House, they will have oversight authority and an opportunity to drive legislation. However, politicians have relearned over the last two years that 51 votes may yield technical control over the Senate, but it takes 60 votes for actual control.
Both Parties Want the Tax Code Cleaned Up
Retirement legislation, Fiscal Year 2023 Appropriations, and tax extenders are only a few items on their lists. Depending on this week’s election results, there are at least three potential outcomes:
1. Both parties decide to work together and actively campaign for comprehensive tax reform where each side gives up a little to get a lot… OK, this is very low probability.
2. Leaders of both parties advocate for their perfect-world option on the Sunday talk shows, but allow the rank and file to vote for a compromise bill where each side gains something.
3. Republicans gain control of Congress and spend the next two years passing legislation that will likely be vetoed by the White House.
Everyone knows the IRS is hamstrung by understaffing and old technology. The IRS leaders who spoke at the conference freely acknowledge and plan to fix these issues. Their goal is to design a modern agency capable of quickly responding to and solving issues while ensuring tax compliance without the need for in-depth audits. They said all the right things. Let’s hope Congress approves a commissioner who can bring it all to fruition.
Have a great Sunday!
Perry J. Green, CPA/PFS, CFP®, CFA®
Chief Financial Officer, Senior Wealth Strategist
Sources: AICPA’s Sophisticated Tax Conference, IRS, Forbes Advisor
Disclosure: Waddell & Associates, LLC (W&A) does not provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. W&A recommends consulting with your tax professional before implementing any tax strategy.