A QCD Might Help You Meet Charitable Giving and Tax Savings Goals
Peggy Vyborny, CPA
In late 2015, Congress reinstated and made permanent a tax break that allows people age 70½ and older to transfer up to $100,000 per year tax-free from an IRA to a public charity and apply that amount to their required minimum distributions. This article discusses the advantages of making such qualified charitable distributions (QCDs) and when they might not be appropriate.
If you are age 70½ or older, have a significant balance in a traditional or Roth IRA and plan to make charitable gifts, consider a qualified charitable distribution (QCD). In December 2015, Congress reinstated and made permanent this tax break. A QCD, also known as a charitable IRA rollover, allows you to transfer up to $100,000 per year tax-free directly from your IRA to a public charity and to apply the transferred funds toward your required minimum distribution (RMD) for the year. However, while IRA rollovers can generate significant tax savings, there are other charitable giving tools that might suit your needs better.
Putting It to Use
A QCD provides tax advantages when a donation of other assets would be wholly or partially nondeductible. This may be the case if you do not itemize or if your total contributions could exceed deduction limits.
Generally, deductions are capped at 50% of your adjusted gross income (AGI) — 30% for donations of appreciated capital assets. Although unused deductions may be carried forward up to five years, these limits reduce the tax benefits of charitable deductions in the current year. In contrast, a QCD is excluded from your taxable income. Essentially, it is the equivalent of an “above-the-line” deduction, so you enjoy the equivalent of a full charitable deduction even if the donation otherwise exceeds AGI limits.
A QCD also may be preferable if your income is high enough to trigger the Pease limitation on itemized deductions. This limitation puts a floor on certain deductions when your AGI exceeds a certain threshold, currently $259,400 for individuals and $311,300 for joint filers. You might consider one if taking an IRA distribution would push you over the income threshold for additional taxes, such as income tax on Social Security benefits or the 3.8% Medicare tax on net investment income.
Taking a Pass
A QCD may not be appropriate if you are in a position to donate appreciated assets, for example, stock or other securities, because they may produce greater tax benefits than a QCD. Take the fictional Elaine, who plans to donate $20,000 to charity in 2016. She is in the 28% tax bracket and must take a $20,000 RMD from her IRA this year. If she uses a QCD to satisfy this requirement, she excludes the $20,000 from her income, saving $5,600 in taxes.
Suppose, instead, that Elaine donates $20,000 in stock that she originally purchased for $5,000. She will have to take the $20,000 RMD, triggering a $5,600 tax. But her charitable deduction for the stock should, assuming her total charitable deductions are less than 30% of her AGI, offset the tax. Plus, Elaine permanently saves the capital gains tax that would be due on the stock, resulting in additional tax savings of $2,250 (15% of the $15,000 gain). The bottom line in this particular example: A QCD could save her $5,600 in taxes, but a stock donation would save her $7,850.
You should definitely think twice before using a QCD to donate IRA funds that would otherwise be tax-free, such as nondeductible contributions to a traditional IRA or nontaxable amounts in a Roth IRA. In most cases, if you itemize, you will be better off taking a tax-free distribution and using the proceeds to make a tax-deductible charitable gift. Because the distribution is tax-free anyway, a QCD provides no income exclusion benefit and it does not qualify for a charitable deduction.
Keep in mind that not all transfers to charity qualify for QCD treatment. Most contributions to public charities, other than supporting organizations, are eligible, but distributions to private nonoperating foundations, donor-advised funds and charitable remainder trusts are not.
Executing Your Strategy
A QCD is invalid if the IRA custodian distributes the funds to you rather than directly to the charity, if you receive something of value from the charity in exchange for your contribution, or if you fail to obtain a proper written acknowledgment of your gift. So if you are considering a QCD, talk to your legal and financial advisors or call us. These advisors can help ensure that you execute a valid transaction in a way that is appropriate for your specific situation.
How Disability Insurance Protects Your Finances from the Unexpected
David B. White, CPA
Even when an employer provides long-term disability insurance, the amount of that coverage may not meet employees’ living costs. This article stresses the importance of having adequate coverage, which may necessitate buying an individual policy. It covers the associated costs and potential benefits.
When a friend was seriously injured in an auto accident and faced at least several months of rehab and recovery, it got Janie and Douglas thinking. How would they cope financially if one of them were disabled for a long period? For the average person, you are more likely to become disabled than you are to die prematurely. Meaning, in many cases, disability insurance is more useful than life insurance.
Janie’s employer offered some coverage, but the couple doubted it would be sufficient. Douglas was self-employed and did not have long-term disability (LTD) coverage. He was worried that he would have to pay high premiums to buy insurance on his own. The spouses sat down with their financial advisor, who stressed that, because their biggest asset was their ability to earn, they needed to look into getting more LTD coverage.
The difference between STD and LTD, STD starts relatively quickly after you are injured, i.e. ten days or two weeks and continues up to a year or more. LTD starts much later say six months to a year, after injury, but continues for a longer period of time, up to age 65. These factors are determined by the specifics of your individual policy.
Individual Policies Offer More
Like Janie, you may have some coverage through your job. Most people receive short-term disability coverage, for injuries and illnesses lasting anywhere from two weeks to two years, as part of their employer’s benefits package. Less common, but no less important, is long-term coverage. However, even when an employer provides long-term coverage, the amount of that coverage often is inadequate to meet living costs.
If your employer does not offer disability insurance, or provides less than adequate coverage, or if, like Douglas, you are self-employed, consider buying an individual policy. This type of disability policy may actually offer several important benefits not provided by group coverage. For example:
- It is portable, meaning your policy will stay in force even if you leave your job.
- Disability income received from an individual policy is income tax free, as long as you pay the premiums yourself.
- An individual policy allows you to decide how much coverage you need.
Cost is a Consideration
The main drawback of buying your own disability insurance policy is that coverage can be expensive. Many factors go into determining the cost, such as your age, current health status and the amount of coverage you want. Establishing disability insurance when you are younger and healthier can be a great investment in protection of your future nest egg.
Generally, the older you are or the longer your desired coverage period, the more you can expect to pay in current premiums. Also influencing your policy cost is whether your insurer is permitted to raise your premiums. Non-cancelable policies prohibit cancellation as long as you keep paying your premiums. The length of your elimination period, or how long you must wait before you begin to receive benefits after a disability, will further factor into the cost of your policy. When considering your elimination period, be sure to include your emergency funds and if you wish to exhaust these prior to starting your payout.
Conventional wisdom says you should obtain coverage for 50% to 60% of your net income. But that does not mean you would be happy with that payout. For most people, this will not be sufficient to cover your monthly expenses. It is very important to calculate your minimum living expenses as part of the process of acquiring insurance. You want to insure that you not only cover your minimum expenses, but provide enough money to continue your current lifestyle. Because there is no single right answer for everyone, sit down and calculate how much money you would need each month to meet all of your expenses. If you are not the primary breadwinner, you may not require additional insurance; each case varies based on your needs. The governmental Supplemental Security Income (SSI) program should also be considered as there are no premiums. The process for qualification is longer and the benefits may be smaller; however, any benefits you receive from private insurance do not affect your SSI benefits. Additional monthly income outside of disability insurance may affect your eligibility.
You may be able to save money by not duplicating benefits you already have. For example, if your employer provides short-term disability coverage for one year, you might want to set your policy’s elimination period for at least that long. However, a word of caution: Trying to save money by skimping on coverage is probably not in your best interest. Less expensive policies often lack important protections and may severely restrict your benefits. Your worst-case scenario would be to suffer a disability and then find yourself without the protection you thought you had purchased.
Averting a Potential Crisis
The bottom line is that you never know when an injury or illness might affect your income-earning ability, as it did Janie and Douglas’s friend. Assess your disability insurance coverage now so that you can take steps to avert a financial crisis and help ensure your family remains secure whatever fate throws your way. If you think you need to purchase an individual policy, talk to your financial or insurance advisor for more information.