Dan, knowing a good thing when he sees it, mentioned QCDs to his brother, Rick, who could also make charitable contributions from his IRA and still get the benefit of the standard deduction. Rick has lower income than Dan and he pays 12 percent on his marginal ordinary income. However, as it turns out, Rick’s investment income from dividends and long-term capital gains straddles the threshold between the 12 percent and 22 percent brackets. Above the threshold, the tax on this income is 15 percent, but below, it is not taxed.
Interestingly, Rick, even at his lower tax bracket, gets almost the same benefit from QCDs as his higher earning brother, Dan. Rick’s QCDs also give him two tax benefits: first, he saves the tax on the donation amount at a 12 percent rate for ordinary income, and second, because this IRA withdrawal does not show up on his tax return, a portion of his investment income in an amount equal to the donation falls from being taxed at 15 percent to 0 percent. Total tax rate savings on the QCD amount is 27 percent, or $1,350 on a $5,000 QCD.
In summary, QCDs are a strategy that everyone who is eligible should consider, no matter what your tax bracket. In most cases, they will reduce ordinary income just as itemized charitable contributions did before the tax law changed in 2018. In some cases, they can give even greater benefits by lowering tax brackets.
Excerpted with permission from Your Complete Guide To A Successful And Secure Retirement by Larry E. Swedroe and Kevin Grogan. Published by Harriman House. © 2019. All rights reserved.
Larry E. Swedroe is director of research for Buckingham Strategic Wealth and The BAM Alliance. Kevin Grogan is director of investment strategy for Buckingham Strategic Wealth and The BAM Alliance.