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Are you trying to learn how to deliver massive tax value to your clients? Then look no further. Retirement Tax Services Podcast, Financial Professional’s Edition is a show hosted by Steven Jarvis, CPA. Steven aims to bridge the gap between tax professionals, financial advisors and their mutual clients in their quest for reducing tax expenses in retirement.
Welcome to the Retirement Tax Services Podcast! On Monday’s episode, Steven and guest Matt Jarvis discussed Qualified Charitable Distributions (QCDs). Along the way, Matt shared tips for handling common QCD mistakes professionally.
QCDs can be great opportunities. You can save taxes for some clients. They’re gifts—facilitated by Congress, the IRS, and donors—to charities from IRAs.
This makes them ideal for the charitably-inclined. However, only they will benefit. QCDs exist to provide an added benefit for habitual givers.
If you take proactive advantage of this opportunity, you can add value for clients. For example, QCDs apply, even if the taxpayer can’t itemize their deductions. They go straight from the client’s IRA to the charitable organization. This doesn’t hit the donor’s adjusted gross income (AGI), either.
Similarly, they aren’t subject to traditional charitable contributions’ limitations. For example, making a QCD is not like deducting contributions from a checking account (on a Schedule A). They are both forms of giving, but they have different tax impacts.
Many advisors focus on the limits-side of a QCD. Donations can be as large as $100,000 annually per person. This presents a huge opportunity.
On the other hand, it’s also important to remember: That money isn’t included as adjusted gross income. Clients, especially, need to understand this.
When you make a traditional charitable contribution, your income goes into AGI. Next, if you can itemize it, that amount is removed from AGI to get to taxable income.
Meanwhile, fewer and fewer taxpayers can itemize, due to current tax rules. Additionally, while you don’t have to pay tax on your AGI, many limitations are determined by it. These can significantly impact a client’s tax liability in a given year.
These thresholds may include how much of their social security is taxable. If they’re purchasing their own health insurance from a marketplace, that’s a factor, too. Their degree of eligibility for a premium tax credit affects it.
Only pure donations qualify. If you receive benefit from any portion, that’s taxable income. Steven recommends a favorite metaphor for explaining this to them:
“If you want to support the Girl Scouts, let’s do a QCD. But, if you want to buy girl scout cookies, use your checking account.”
You could buy the cookies (or bid in that silent auction) directly from your IRA account. However, this will complicate things. If you benefited from even a portion of that payment, that amount is taxable income.
To keep things simple, keep them separate. Most people prefer an IRA checkbook. This is easier than taking distributions and filling out a form for every QCD. At the same time, some clients might forget that their IRA checks are exclusively for QCDs.
Pro tip: If you recommend an IRA checkbook, encourage the client to cover it with stickers reminding them of its sole purpose.
Better yet, give them stickers printed with your team’s contact information. A stick-able checklist detailing what to consider (and document) when donating from that account helps, too.
Steven gives more insights on QCDs in this episode of the Retirement Tax Services Podcast. Do you have suggestions? Would you like to share a retirement tax planning experience on the podcast? Drop us a line at email@example.com.
Thank you for listening.
Hello everyone and welcome to the next episode of the Retirement Tax Services Podcast: Financial Professionals Edition. I’m your host Steven Jarvis, CPA, and in this show, I teach financial advisors how to deliver massive value to their clients through retirement tax planning. In case you missed it, on Monday’s episode, I interviewed Matt Jarvis and we talked about a recent experience he had with a qualified charitable distribution or QCD for a client, not being reported correctly to the IRS. Matt provided a lot of great insight on how he handled that specific situation, as well as things he does in his practice to make sure this opportunity gets communicated effectively and tracked efficiently.If you haven’t already listened to that episode, I highly recommend it. A lot of great stuff in there.
On today’s episode, we are going to move past the blocking and tackling and dive into some of the details around QCDs. Now, many advisors are likely familiar with QCDs, but the Secure Act passed at the end of 2019 added some new wrinkles to using this opportunity. And in general, I am a huge proponent of continuously learning. I am confident there is something you can take out of this discussion.
So to get started, let’s quickly reinforce that QCDs are a great opportunity to save money in taxes for clients who are already charitably inclined. If a client is not charitably inclined, there is no situation where they come out ahead from making QCD. This is just an added benefit that we can take advantage of if we’re proactive, if we already have that charitable inclination. In general, QCDs are a method graciously given to us by Congress and the IRS as a way to support charities and pay less in taxes. Even for taxpayers who are not able to itemize their deductions, a QCD is a payment made directly from an IRA account to a charitable organization, and unlike deducting charitable contributions on schedule ‘a’ that you made from your checking account QCDs do not hit your adjusted gross income and are not subject to the same limitations as traditional charitable contributions.
Now, a lot of advisors focus on the limit side, which is a huge opportunity because a QCD can be up to $100,000 annually per person, but it’s also important to make sure you understand, and the client understands the value of that amount, not being included in adjusted gross income or AGI. If you’re making a traditional charitable contribution, your income goes into AGI, and then if you can itemize and fewer and fewer taxpayers are able to do that based on current tax rules, the amount of the charitable contribution is removed from AGI and to get to taxable income. While you don’t have to pay tax on AGI, there are many thresholds and limitations based on AGI and modified AGI that can have significant impacts on a client’s tax liability in a given year. Some of these might include affecting how much of social security is taxable for a client and how much of a premium tax-credit a taxpayer purchasing their own health insurance from a marketplace is eligible for.
To be considered a QCD, the payment has to be made directly from an IRA account to a charity, and only the portion that is a pure donation qualifies. So any portion that you receive some sort of benefit for, would be taxable income. My favorite example from advisors on how to explain this to a client is: if you want to support the Girl Scouts, let’s do a QCD, but if you want to buy girl scout cookies, use your checking account. You technically could buy the girl scout cookies or participate in a silent auction or whatever else your favorite charity is doing to encourage donations directly from an IRA account, but it gets really messy. Any portion of the payment to the charity that you received a benefit for becomes a taxable distribution. It makes life much simpler to just keep them separate. Support the cons from your IRA, buy the cookies from your checking account. Logistically you can either take a distribution and fill out a form every time you want to make a QCD, or you can get a checkbook tied directly to your IRA account.
Pro tip:If you’re going to recommend a client have a checkbook for an IRA account, make sure you have them put stickers all over it, reminding them it’s for their IRA account and only for making QCDs. Or if you want to take it up a level, provide them stickers with your team’s contact information and a checklist of what they should consider and what they should document each time before and as they are making a contribution to a charity using that checkbook.
In addition to the tax benefit of making QCDs, this is a great way to take care of required minimum distributions, which is another advantage over traditional charitable contributions. The Secure Act increased the age when RMDs start to 72, but did not change the age a person is eligible to make QCDs, which is still 70 and-a-half. If your clients are charitably inclined, I would highly recommend you start talking to them well before they are 70 and a half. So they know what is coming and are prepared for it. Even though RMDs don’t start until you are 72 – based on current rules – making QCDs starting at 70 and-a-half, we’ll reduce the amount RMDs are calculated on when a client gets to 72. As a reminder, that cap of a $100,000 per person on QCDs is not connected to the RMD amount.
So, whether they have an RMD, or if that RMD is less than a $100,000, QCDs can still be taken up to that $100,000 per person. Another wrinkle from the Secure Act is that it lifted the age restriction on making IRA contributions. If a client makes IRA contributions after 70 and-a-half, this has a direct impact on how much of a charitable donation from an IRA account actually counts as a QCD. The IRS is apparently really worried about people abusing this opportunity to make IRA contributions after 70 and-a-half, and then turn around and donate the money to charity so they got really detailed with the restrictions. I won’t go through all the details here, but if you have clients making IRA contributions after 70 and-a-half, and they are charitably inclined, make sure you are looking at those rules. Similar to traditional charitable contributions the IRS does set a standard for maintaining evidence that the amount was in fact donated to a charitable organization. You should encourage your clients to get a written acknowledgement of their gifts and to maintain a record of that. I work with advisors who will keep copies of those records for their clients just in case and I highly recommend that approach. Okay, so that covers a lot of the details around QCDs. So let’s pivot a little bit and talk about some logistics and potential pitfalls.
One area that clients often miss if they get set up with a checkbook for their IRA account, is that there has to be cash in the account to be able to write a check.You can’t write a check from your apple stock. All the more reason to put stickers on their checkbook with your team’s contact info and instructions to call someone on your team responsible for this anytime they have a question. We just talked about documentation of the donation, but this is one that you definitely need to be proactive and intentional about. Some custodians will keep copies of voided checks as a last resort, but really the client needs to be getting something in writing from the organization they donated to and keep that in their records. When it comes to reporting QCDs, if the IRS isn’t notified, it didn’t happen. That may sound simple, but form 1099, where distributions get reported does not have a box for indicating something as a QCD and this gets missed often. Which is what happened in the story that Matt shared on our last episode. We talk about it a lot, but this is a perfect example of why you need to get tax returns for all of your clients to make sure things like QCDs are being reported correctly. Related to this because the QCD doesn’t have a place to be reported on the 10 99, the distribution will most likely be reported as taxable on the 10 99 from the custodian, and then will not be included in income on the tax return when it gets reported as a QCD. In some cases, this will generate an IRS mismatched letter in the future, which can be scary for a client to receive if they haven’t seen one before, or if they’re not expecting one. The best thing to do is let your client know this is a possibility and say something like,‘if a mismatched letter comes we will provide the IRS with documentation, and everything will be fine.’ This reinforces the benefit of advisors maintaining copies of the supporting documents for a QCD. So you can make this easy on them if they were to get this mismatched letter from the IRS.
One of the other takeaways from Matt’s story that I want to circle back to: advisors sometimes will ask, how much does a QCD need to be to make it worth it? Because there is no minimum related to QCDs, it’s just that maximum of a $100,000 per person. In Matt’s story, the QCD was only $900. The answer is that it really is up to the client. Don’t make assumptions about their money for them, have the conversation, present them with the opportunity. One of the best things that you can do for your clients, if you help them make QCDs is to proactively communicate with their tax preparer, to let them know what to expect and hopefully prevent any confusion or errors. If you already provide your clients with a 1099 letter each year summarizing what 1099 as they should expect.It is really simple to add this as an addition to that existing communication.
Now, if you want to dive deeper on any of this IRS publication 590-b covers QCDs and all the requirements, and publication 526 covers the situation where you are receiving value in return, such as the girl scout cookies, along with what documentation is required for QCDs which the IRS refers to as substantiation requirements, both of these publications will be linked in the show notes if you’d like to find them. In addition, Retirement Tax Services has put out a newsletter dedicated entirely to QCDs that summarizes what I’ve talked about today and provides additional details, scripts for working with clients and tax preparers, other landmines to look out for and a great flow chart outlining the process. If you’d like a copy of that newsletter, go ahead and send an email to firstname.lastname@example.org, and we’ll be happy to send it your way that’s email@example.com.
Alright, as always, we want to end with action items. So first action item, make sure you have a way to track in your CRM any tax planning strategies you help a client with during the year, including QCDs. This will make prepping for future client meetings easier, but it will also make your tax return review and your communication with the client’s tax preparer easier. Second action item, get tax returns for every client every single year. I know I mentioned this on every episode, but that’s how important this is. Specifically, for QCDs this is the only way you can be sure, the strategy you recommended and helped implement was reported correctly. Last action item, please take a minute to give us five stars and leave a comment wherever you listen to podcasts, we love the feedback and this helps our community continue to grow. Thanks for listening, good luck out there and remember to tip your server, not the IRS!
The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.