What If

These are probably the most important pages on this website!

We are all used to telling our employer how many exemptions we have so they can make the proper tax deductions during the year. For most of us the first time we look at our potential taxes is in January of the following year when we get our W-2s in the mail.

We can do basically the same thing during retirement, but now that we have seen what our Personal Tax Hump looks like and realize that we can save thousands of dollars each year if we avoid those extreme marginal tax rates, we should all consider doing the opposite! Start doing your tax calculation this January, not next January, and keep asking yourself What If every time you decide to create extra taxable income!

Use the following links to examine the details of each of these
What If situation that you could be facing during your retirement.

  • You prepared properly for year end unexpected income.
    • 22.2% You received a taxable bonus or short term gains.
    • 10.2% You received some long term capital gains.
  • You did not prepare for year end gains and some of your income was LTCGs
    • 49.95% You received a taxable bonus or short term gains.
    • 37.95% You received some long term capital gains.
  • You did not prepare for year end gains and none of your income was LTCGs
    • 40.7% You received a taxable bonus or short term gains.
    • 33.7% You received some long term capital gains.
  • Break Even Detailed examples after Federal, State, and Local taxes.
  • QCD Detailed example of a Qualified Charitable Distribution.

What is a Qualified Charitable Distribution?
Iím not a tax accountant, so use everything on this page at your own risk!

The content of this website has concentrated heavily on the massive Marginal Tax Brackets created by the double and even triple taxation of our IRA withdrawals, our Social Security Benefits, and our Long Term Capital Gains. What if you could redirect those massive taxes from the IRS to your favorite charity? When done properly, that is exactly what a Qualified Charitable Distribution can do!

One of the things that I highly recommend for everyone is that you start doing your taxes in January of the current year so that you can track the maximum amount of your taxable income before you reach your Personal Sweet Spot. Once you reach age 70 Ĺ, one of the items on that income list will be your MRD, the Minimum Required Distribution that you will be forced to withdraw from your taxable IRA account each year.

For most of us, the MRD is usually the first IRA withdraw of the year. If you are lucky enough to also have a sizable non-IRA brokerage account and you are doing a lot of trading in that account during the year, there is a good chance that you could reach the end of the year before you are forced to take your personal MRD.

Here is an example of what might happen in this situation:

This individual has done a lot of transactions in their personal non-IRA brokerage account. Theyíve had a number of gains and losses and $6,000 of those gains have been tax delayed Long Term Capital Gains. It is late December and they havenít done their MRD yet. Their pre-MRD tax situation is represented by the light blue tick mark in this graph, and their total tax situation, if they merely withdraw their entire $8,000 MRD from their IRA, is represented by the purple tick mark on the far right.

To make the numbers easier to compare, this example was specifically designed so that the first $4,000 of their MRD falls within their Personal Sweet Spot and the second $4,000 falls within their Personal Tax Hump.

If this individual merely does their MRD without a QCD, their total Federal, State, and Local taxes will be $3,406 and they will have $4,594 to spend. But, what if they decided to split their MRD as illustrated by the table to the right. The will pay 29.7% of the first half of their MRD as taxes. They will have $2,812 to spend and their charity will get the complete $4,000 from the other half of their MRD.

The key to making this work is to do the Qualified Charitable Distribution through your IRA broker. Make sure that they give you a 1099-R at the end of the year that reports a standard distribution with $0.00 taxes withheld and the zero tax entry is also flagged as a QCD.

This $4,000 will be counted as part of your MRD, it will not be counted as taxable income, it will not increase the amount of your Social Security that will become taxable, and it will not be counted in your MAGI for your Medicare premium.

Let's look at another example where you have followed all the previous guidelines from this website and you are now hit with some Christmas Spirit.

   

You followed the guidelines and youíve withdrawn every dollar you could within Your Personal Sweet Spot. Then you hear of a situation where a Qualified Charity is helping out on something that is breaking your heart at Christmas time. You want to send that charity a nice check for about $1,500 from your personal checking account, then you remember the QCD option so you can double your contribution, $1,554 from yourself, and $1,446 from the IRS!

I am far from qualified to give you this or any kind of tax advice, so always check with your tax advisor before you try to make a Qualified Charitable Distribution from your IRA. That said, here are some of the things that I have uncovered on-line regarding QCDs:

  • You must be at least 70Ĺ years old at the time you request a QCD. If you process a distribution prior to reaching age 70Ĺ, the distribution will be treated as taxable income.
  • For a QCD to count toward your current year's RMD, the funds must come out of your IRA by your RMD deadline, which is generally December 31 each year.
  • Any amount donated above your RMD does not count toward satisfying a future year's RMD.
  • The maximum annual distribution amount that can qualify for a QCD is $100,000. This limit would apply to the sum of QCDs made to one or more charities in a calendar year.
  • Funds must be transferred directly from your IRA custodian to the qualified charity. This is accomplished by requesting your IRA custodian issue a check from your IRA payable to the charity. You can then request that the check be mailed to the charity, or forward the check to the charity yourself.
    • Note: If a distribution check is made payable to you, the distribution would NOT qualify as a QCD and would be treated as taxable income.
  • The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions. Some charities do not qualify for QCDs:
    • Private foundations.
    • Supporting organizations: i.e., charities carrying out exempt purposes by supporting other exempt organizations, usually other public charities.
    • Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals.
    • A tax advisor can help you determine if both your IRA and charity qualify for QCDs.
    • State tax rules may vary, so for guidance, consult a tax advisor.
  • A QCD is reported by your IRA custodian as a normal distribution on IRS Form 1099-R.

I hope that this information will be helpful for your retirement plans. Just remember that the information is coming from a computer Geek who does not have any credentials for investments or taxes. While I believe that the information is correct, like anything else that you read about on the Internet, double check itís accuracy for yourself before you use it!

My best wishes for your happy and safe retirement!