With equity markets rebounding, job numbers increasing and the economy generally being on more sound footing, 2016 may be the right time for clients to think about increasing their charitable giving over previous years when financial times were more uncertain. harities have undoubtedly felt the impact of the economic instability of previous years and need to replenish their reserves to continue providing for the community in good times and bad.
The equity markets have bolstered IRA and retirement portfolios, so for those that qualify, a Qualified Charitable Distribution (QCD) (commonly known as the Charitable IRA Rollover) may be a better choice than traditional charitable giving: 2016 marks the first full year the rule is permanently in place.
Unfortunately, clients are still largely unaware of this planning strategy unless raised by their financial or tax advisor. Part of the issue is that the QCD is not broadly available to everyone, but only to those who are over age 70 ½ years and subject to required minimum distributions (RMDs) on their IRAs. Advisors need to educate clients who fit the requirements for QCDs of its potential benefits.
QCDs are useful for those clients who are required to take RMDs from their IRAs, don’t need the income, and want to avoid the increase in income taxes that the RMD would generate – all while making a difference. In that regard, a QCD is superior to taking a RMD from an IRA, paying taxes on that income, and then making a charitable contribution.
RMDs increase adjusted gross income which may result in several adverse consequences, including, among others:
a) putting the taxpayer into a higher income tax bracket;
b) raising Medicare premiums;
c) raising taxes on Social Security benefits;
d) limiting itemized deductions.
A QCD avoids all that and also satisfies that year’s RMD requirement. With respect to the charities that may be recipients of these distributions, they must be public charities as described in IRC Section 170(b)(1)(A). They cannot be private foundations, donor advised funds or charitable supporting organizations.
The markets have also grown brokerage accounts leaving clients with capital gains issues. Appreciated securities might be ideal assets for outright charitable gifts or for use in charitable remainder trusts.
This year may also be a better year for substantial gifts by high income and high-net-worth donors because of the uncertainty that has been created by President-elect Trump’s tax proposals.