TAX ADVISOR

James G . Blase

A donor-advised fund can help retirement plan beneficiaries with the tax bite .

OST PEOPLE ARE AWARE THAT , UNDER THE CURrent tax laws , an IRA owner who has reached age 70½ can make a direct donation of $ 100,000 from their account to a charity without having to report the contribution as income . This is often referred to as a “ qualified charitable distribution ,” or “ QCD .”

This is a great way for people over 70 to both give money to charity and save on taxes . The taxpayer is essentially giving pretax money to a worthy cause , which in effect creates a dollar-for-dollar income tax deduction they ’ d otherwise not receive . It ’ s especially helpful under the current tax regime . The federal standard deduction for those over 70 , married but filing jointly , currently stands at over $ 30,000 ( including the additional amount for seniors ). Also , there are limits on people ’ s state and local income tax deductions ( which stop at $ 10,000 ). Because of the high standard deduction and the state and local limits , and the fact that most people 70 and over are unlikely to have much in the way of deductible interest charges , all or much of a person ’ s annual donations to charity are currently not tax deductible . The QCD allows taxpayers to circumvent this problem and get deductions in a different way , so the strategy is a win for these clients .

What about taxpayers who aren ’ t that old ? Is there a way for them to donate pretax IRA or 401 ( k ) moneys to charity ? If not , these deduction hurdles will likely mean they ’ ll be doing their charitable giving with after-tax dollars .

People seeking innovative tax strategies face another problem : the

What about taxpayers who aren ’ t over 70 ? Is there a way for them to donate pretax IRA or 401 ( k ) moneys to charity ?

SECURE Act , passed by Congress in 2019 . This legislation created a double whammy for retirement plan beneficiaries . If they inherit money from the IRA or 401 ( k ) plans of deceased parents or other relatives , they not only have to add those proceeds to their taxable income — but squeeze it all into a tight 10-year period . That money is likely to flow into their accounts during their peak earning years , which means their taxes will rise much more than they would if they were retired . The double whammy is this : The higher income taxes must be paid within 10 years of the account holder ’ s death , rather than deferred over the beneficiary ’ s lifetime . The combination of these two factors — significantly higher income taxes and the lost time value of the money for the years the beneficiaries survive — can easily mean a total loss of twice as much as what the inheritors would have lost under the law before .

These SECURE Act problems are exacerbated by the tax deduction hurdles , meaning most IRA and 401 ( k ) beneficiaries ( especially those with little or no mortgage left on their homes ) won ’ t receive a full federal income tax deduction for what they give each year . Some of the tax deduction problems could be resolved if the deduction limits are restored in 2026 to their past levels ( that ’ s the year the Tax Cuts and Jobs Act might sunset ). In that case , taxpayers could again take

24 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2023 WWW . FA-MAG . COM