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Comprehensive Financial Planning Strategies Are Even More Important After This Year’s Tax Season

In the Aftermath of the Tax Reform and Jobs Act of 2017 Your Advisor May Now Be Able to Help You: Reduce Your Taxes, Maximize Your Savings & Achieve Your Philanthropic Goals During Your Retirement Years

Brandi Graham, CTFA, CFP® and Cynthia Rivera, JD

The benefits of savvy strategic planning are significantly greater today as we grapple with the changes stemming from the recently enacted Tax Reform and Jobs Act of 2017 and its new standard deduction. While many taxpayers are likely to benefit from decreased tax rates and expanded tax brackets, the new tax law will prompt many to claim the higher standard deduction rather than to itemize deductions. Under the new law, if you claim the standard deduction, you will not receive a tax benefit for any itemized deductions, including your charitable contributions. You may need to reevaluate your financial plan to minimize your overall tax liability. How you donate to your favorite charity or organization can be a powerful tax-efficient decision.

Strategy: Qualified Charitable Distribution (QCD)

Even if you claim the new standard deduction, you may be able to derive a tax benefit from the use of a QCD. This strategy may be ideal for individuals over the age of 70 ½ who are required to withdraw funds from an Individual Retirement Account (IRA). Distributions from an IRA are generally considered ordinary income and are taxed accordingly. However, the use of a QCD could allow you to donate all or part of your Required Minimum Distribution (RMD) directly to a qualified charity or organization up to $100,000 per year and avoid taxation on the funds coming from your IRA.

To benefit from this strategy the funds from the IRA’s RMD must go directly to the charitable organization. That is, instead of withdrawing your RMD and writing a check to support your favorite charity, you will complete a QCD form, allowing all or a portion of your RMD funds to by-pass you and go directly to your favorite cause. It is important to note that only distributions from IRAs are permitted for a QCD. Employer plans such as a 401K, do not qualify. A little upfront planning for your RMD could ensure that you meet your philanthropic goals and, at the same time, enjoy the added benefit of lowering your overall tax liability.

Subsequent Benefits: Savings on Medicare Premiums and Taxable Social Security Income

Additional benefits from a QCD are a potentially lower cost for Medicare Part B and D premiums and a reduction in tax associated with your Social Security income.

Medicare Premiums

In general, Medicare recipients pay approximately $134 per month for Medicare Part B. However, for those with incomes in excess of $107,000 for single filers and $170,000 for those filing a joint return, the monthly premium could range between $187.50 to as much as $428.60 per person. The Income Related Monthly Adjustment Amount (IRMAA) determines your Medicare premium, and is based on the Modified Adjusted Gross Income (MAGI) reported on your tax return from two years prior. Thus, your 2018 IRMAA is based on your 2016 tax return. By electing to use the QCD strategy, the RMD will not be included in your taxable income, thereby reducing your MAGI for Medicare purposes.

Social Security Income

Even if you are not subject to the increased Medicare premiums, you could still benefit from a QCD. Up to 85% of your Social Security income can be subject to tax depending on your MAGI. Thus, if you reduce your MAGI by opting for a QCD you could also decrease the amount of your Social Security income subjected to income tax.

Strategic implementation of the QCD can enable you to satisfy your IRA’s RMD, maximize your savings, reduce your Medicare costs and efficiently minimize the taxable portion of your Social Security benefit. If you are over age 70 ½, consider using the QCD as part of your overall financial strategy. Even if you are not 70 ½, you can begin to position yourself to benefit from these rules when you turn 70 ½ and begin taking IRA RMD.

Strategy: Gifting Appreciated Securities

Another popular tax saving strategy is to gift appreciated securities. When you donate highly appreciated stock to a charity, you avoid having to pay capital gain tax on the gain. If you are able to itemize deductions, you can also take a charitable deduction for the market value of the stock at the time of the gift. In addition to avoiding capital gains tax, you may be able to receive a charitable deduction if you itemize instead of taking the standard deduction. With the stock market being highly elevated this may be a good time to consider a gift of appreciated stock. As with QCDs, it is important to donate the security directly to the charitable organization rather than selling the security and later gifting the proceeds.

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The strategic use of tax rules and financial planning could reduce your tax liability, maximize your savings and help you reach your philanthropic goals. Contact us if we can assist you in achieving your plan.

Before executing any of these strategies be sure to consult with your Financial Advisor to discuss your own unique needs and goals

By |2018-11-21T12:33:01+00:00May 24th, 2018|Charitable Giving|