A common tenet of most martial arts is to only use them in self-defense. This is especially true for judo which literally translates to ‘gentle way’ in English. One thing that I love about the sport is how a skilled judoka can abruptly shift the momentum of a match through a sly reversal of oppositional aggression. On such move is the Kibisu-gaeshi. This maneuver, if performed correctly, takes your opponent from an over-confident instigator to a humiliated sack of potatoes by yanking the same-side ankle up into the air like a cell phone you just dropped in water. According to Wikipedia, it’s hard to defend.
For those of you who lack skills in the martial arts department (I only made it to yellow belt in judo), we can still garner inspiration to be applied in other aspects of life. One of my favorite opponents to Kibisu-gaeshi is the IRS. Like in judo, we are beholden to a strict set of rules when it comes to what we can and cannot do to avoid penalties as a taxpayer. I strongly advocate playing the game within the ruleset.
The tax code is so vast that it takes immense skill and knowledge to become a tax planning back-belt. We will not get there today but I can at least get you to the judo-equivalent level I reached in 3rd grade by addressing Qualified Charitable IRA Distributions (QCDs) and Donar Advised Funds (DAFs). Tis the season of giving, after all.
First, let’s address QCDs which are only available to those 70 ½ or older. Prior to the SECURE 1.0 and 2.0 acts, which pushed the Required Minimum Distribution (RMD) age to 72 and 73, the QCD rule was meant to align with the original 70 ½ RMD age. Fortunately, the QCD age requirement was not pushed back along with the RMD age. This means any taxpayer 70 ½ or older can give to a 501(c)(3) organization directly from a pre-tax IRA account. A perfect way to divert unwanted taxable income from a Required Distribution.
Why would you do this, you may ask? Well, in 2017 most Americans began taking the standard deduction over itemized deductions due to its massive increase over prior years. The deduction is $13,850 for single filers and $27,700 for joint filers for 2023. These amounts increase to $14,600 and $29,200 respectively in 2024.
Charitable contributions, like mortgage interest, are considered itemized deductions. Unless you have a massive mortgage interest payment, are incredibly generous, or both, it’s unlikely you benefit from charitable contribution deduction.
However, if you distribute funds from a pre-tax IRA directly to a charity, money that you or your beneficiary are destined to pay tax on at some point, it effectively negates the 1099R income. This can be done up to $100,000 per individual per year. The icing on the cake for those of RMD age is that QCDs also satisfy the RMD, dollar for dollar. It would still make sense to give to charity via QCDs the two years between the QCD qualifying age and the RMD age if you take the standard deduction.
This does little to help the less life-seasoned taxpayers looking to pull a fast maneuver on the IRS for charity’s sake. In comes the Donor Advised Fund (DAF). This is a charitable account sponsored by an organization, usually a financial institution, donors can contribute to as frequently as they want. Donors retain advisory privileges and can recommend grants to their favorite charities whenever they like.
Importantly, taxpayers can claim the deduction the year the donation is made to the DAF, which is very handy. Generous individuals that normally take the standard deduction could lump sum several years’ worth of planned giving into one year to overcome the high standard deduction threshold, thus potentially qualifying for an even higher itemized deduction. The donor could then steadily release these gifts over the planned giving period through the grant process.
This effectively stacks two or more years’ worth of charitable giving into one mega-year. Subsequent years, you just take the standard deduction as you normally would. Hiya! This method will lose some potency if the personal tax cuts provision of the 2017 Tax Cuts and Jobs Act sunsets in 2026, which is the current plan. Hopefully, congress extends these provisions.
Before you ask, you cannot use QCDs to fund DAFs. Believe me, I’ve looked into it. There’s only so much face planting the IRS will tolerate before the ref throws the penalty.
With only 14 business days left in 2023, it is strongly suggested to not procrastinate if you are trying to determine if any of these ideas are right for you. Your advisor or tax professional would be great starting points of contact. We are available to take your calls up until December 22nd. Our office closes for the Holiday week between the 25th and New Years’ Day. The egg nogg is just too good.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Individual tax and legal matters should be discussed with your tax or legal professional.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.