Things to Remember Around Tax Time if You’ve Made a Qualified Charitable Distribution

Form 1099-R is issued around tax time to report distributions you took during the previous year from a retirement account. Among other things, this form tells you and the IRS how much was withdrawn in total, how much of the distribution was taxable and whether there was any withholding for federal and state income taxes.

For those who gave part or all of their required minimum distribution directly to charity through making a qualified charitable distribution (QCD), this amount is still included in the taxable portion of your total distribution on form 1099-R. As you’ll see, the QCD is included in your gross distribution (box 1) and taxable amount (box 2a); however, the box for “taxable amount not determined” (box 2b) will be checked. Whether you work with a professional tax preparer, use software like TurboTax or prepare your own taxes by hand, it can be easy to forget that the QCD portion of your distribution should not be included in your taxable income on your tax return. It’s important to keep a record of any QCDs made during the year and hold on to the receipts or letters that you receive from the charities confirming receipt of the funds.

Below is a blank version of the 1099-R available on the IRS website.

 

This is a copy of a 1099-R issued by TD Ameritrade.

In this example, the individual had a $70,000.00 gross (line 1) and taxable distribution (line 2a). The box next to “taxable amount not determined” (line 2b) is checked. Federal income tax of $8,000.00 was withheld (line 4). The distribution was considered a “normal distribution” because the distribution code 7 was used (line 7). What this 1099-R doesn’t tell you is that $20,000 of this individual’s RMD was a QCD, while the remaining $50,000 of the withdrawal was taxable.

You should put the information from the 1099-R on the first page of your tax return (Form 1040) on line 15a and 15b (shown below). In the example, the individual had a total IRA distribution of $70,000. Of this distribution, $20,000 was a QCD. This means that the QCD won’t be included in your taxable income. If you have the option, write “QCD” to the left of box 15b on your tax return. You need to add the $8,000 federal income tax withheld from this IRA distribution to any other federal withholdings from W-2s and/or 1099s for the year on line 64 (page 2) of your tax return.

If you had basis (after-tax contributions) in the Traditional IRA from which you made the QCD and took a regular distribution, you must remember to file IRS Form 8606 Nondeductible IRAs. You must also file this form if you made a QCD from your Roth IRA. While we would not suggest making a QCD from a Roth IRA since the account is after-tax versus pre-tax, you can do that.

By reporting QCD’s correctly on your tax return, you rightfully receive the benefit of income exclusion.

A More Efficient Way to Give: Donor-Advised Funds

Being philanthropic can mean you donate your time, expertise and/or financial resources to support a charitable organization. When donating financial resources, there are ways to give that maximize the benefit of the gift. Did you write a check? If so, where did that cash come from? Did it require you to withdraw from a retirement account, or realize any capital gains to create this cash? If you have a taxable investment account, then using a donor-advised fund is a more efficient way to give.

What is a donor-advised fund? 

A donor-advised fund (DAF) acts like your own mini-charitable foundation. DAFs have been around since the early 20th century, but more recently have become the fastest growing method of giving in the United States. Grants to qualified charities in 2015 alone from donor-advised funds totaled $14.52 billion. You can donate assets to a DAF and receive the tax benefit that year, while having the flexibility to distribute the funds in increments, and over whatever period you’d like. Unlike private foundations, DAFs don’t have legally required annual distributions.

What can be put in a donor-advised fund? 

  • Cash
  • Publicly traded securities including stocks, bonds and mutual fund shares
  • Restricted and controlled stock * Privately held stock
  • Real estate
  • Proceeds from life insurance or from a full-paid policy
  • Private foundation grants or terminations
  • Bequests
  • Named beneficiary of charitable remainder trust
  • Named beneficiary of an IRA, 401(k) or other retirement account
  • Tangible personal property

Most commonly, families donate appreciated securities such as stocks and mutual fund shares from a taxable investment account to a DAF.  (more…)

Determining the Best Charitable Vehicle for Your Goals

We’ve been working with clients across the country for over 30 years, and we understand how important it can be to share your success by donating to charitable organizations, whether it’s through volunteering time or giving money. Once this charitable intent is determined, the next step is to determine how best to give. The following steps can help you identify the most efficient way to give, according to your circumstances.

Step 1 – Identify a cause that’s important to you

From supporting education and providing funds for cancer research, to protecting the environment and ensuring human rights for all, the list of worthy causes is endless. What’s important to remember when being philanthropic during your lifetime is that you have complete control over who receives your money or time.

Step 2 – Decide if you want to volunteer your time, money, or both

Being philanthropic doesn’t always mean writing a check. Many people give their time or expertise to organizations. This includes volunteering at events, raising money, participating on the board of directors, committees, etc. Some volunteer and also give money to organizations that are important to them. For many, they may not have the time or ability to volunteer due to a number of circumstances, however they choose to share their financial resources instead.

Step 3 – What are your funding sources?

If you decide to give part of your wealth, then the next step is determining how best to fund your gift. Do you have cash? Taxable investment accounts with securities (stocks or bonds) that have appreciated in value? Do you have a retirement account? Do you have a life insurance policy?

Step 4 – Is this a one-time or recurring gift, and do you want to make it during your lifetime or from your estate?

These are important considerations, as they impact the method you use to make your donation. For some of the methods listed in step 5, you can make a one-time, planned gift that can be distributed over many years to one or many charitable organizations. The giving method may be different for a one-time gift or recurring annual gifts to an organization or to charity in general. (more…)

Merriman INSIGHT – Using Qualified Charitable Distributions to Maximize Charitable Gifts

On December 18, 2015, the president signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. One of the popular tax provisions in this bill was to permanently extend the ability for IRA owners to make qualified charitable distributions (QCD) from their IRA to a qualified charity of their choice. Prior to the PATH Act, this provision expired multiple times since its debut in 2006, only to be temporarily extended by Congress each time, often at the last minute or retroactively. This uncertainty made charitable planning more difficult, but now we finally have clarity!

For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.

Here’s how it works

IRA owners who are 70½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to qualified charity. The IRA owner can exclude the amount of the QCD from his or her gross income (thereby reducing their adjusted gross income), but any donation made via a QCD is not eligible for a charitable deduction. From a tax perspective, an exclusion from income is preferable over a deduction from income — particularly for those who don’t meet the itemized deductions threshold in the first place.

As with many IRS provisions there are a number of fine print items to keep in mind.

  • You’re only eligible to make a QCD if you are 70½ or older.
  • Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
  • Donor advised funds and private non-operating foundations are not eligible to receive QCDs.
  • The QCD must be made directly from your IRA to the desired charity, meaning the check issued from your IRA must be payable to the organization. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
  • The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
  • The QCD cannot be a split-interest gift, meaning 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor (for example, Charitable Remainder Trusts or Charitable Lead Trusts would not qualify). The donor cannot receive any economic benefit as part of the gift.

If you are interested in making a donation directly from your IRA to a charity, please reach out to your advisor to get started and make 2016 a year of giving!

A Win-Win for the Charitably Inclined with IRA Assets

iStock_000072625963_DoubleGenerally speaking, investors have separate retirement and non-retirement accounts. In most cases, the retirement accounts are split between Traditional IRAs (i.e., Rollover, SEP, Simple, 401(k), 403(b), 457, etc.), which are pre-tax dollars, and Roth IRAs, which are after-tax dollars. Non-retirement accounts include trusts, individual accounts and joint accounts.

Upon the owner passing, non-retirement accounts usually receive a step-up in their cost basis, meaning long-term capital gains are wiped out for that person’s heirs. In most circumstances, heirs could rebalance or cash out the portfolio and owe little or no capital gains taxes.

Roth IRAs maintain their tax-free growth and withdrawal nature, but do require annual required minimum distributions (RMDs). Pre-tax IRAs, however, behave differently. While they will maintain their tax-deferred growth advantage, their annual RMDs are 100% taxable as ordinary income. If the beneficiary is in the 25% marginal tax bracket, for example, then a $20,000 Traditional (Beneficiary) IRA distribution will owe $5,000 in federal income taxes. Often these distributions push the beneficiary into a higher tax bracket.

Since non-retirement accounts and Roth IRAs are more tax-friendly for heirs, it may be worth considering the possibility of naming a nonprofit organization, like an alma mater or favorite charity, as the beneficiary of Traditional IRA assets. Instead of heirs paying ordinary income taxes on future distributions, the nonprofit organization will be able to utilize 100% of the assets for their organization’s purposes because they are tax-exempt and won’t owe any taxes on distributions. This is especially attractive for those who are charitably inclined and are trying to determine which asset is best. Other benefits include that your estate will be reduced by the amount of the bequest (possibly reducing or removing any estate taxes owed), and your heirs will receive the most tax-friendly assets.

Each client’s circumstances are different, so we recommend you discuss this with an advisor to see if it makes sense for you and your family.

Seahawks, Merriman and Bowling

We recently had the opportunity to be the title sponsor for Merriman Live Bowl United Presented by Team Avril, a bowling tournament for all ages and skill levels hosted by Seattle Seahawk Cliff Avril. He was joined by several of his teammates: Red Bryant, Brandon Mebane, Michael Bennett and Clinton Mc Donald.

DMerrimanSeahawksuring this fun evening, a few Merriman clients and employees got to hang out with some Seahawks and show off their bowling skills at West Seattle Bowl. I think I threw more gutter balls than strikes, but that did not matter because the evening was about having fun and supporting a great nonprofit organization.

Net proceeds benefited United Way of King County and Strikes for Kids, a nonprofit organization that partners with professional athletes in bringing local business, fans, children and sports together for great causes. There is no better feeling seeing the excitement that the children have to meet their favorite Seahawk while having fun with their family. Strikes For Kids coordinates these bowling and golf tournaments across the United States. We were thrilled and honored to sponsor this first event in the Seattle area.

Below are some links to check out video coverage and photos from this event. Go Hawks!

Seahawks video

Komo News coverage

Live Bowl United