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The Benefits of Tax Efficient Investing Part 2 of 2


Last time we published a blog we discussed how to position your investments according to your tax bracket.  Next, since you have that 2022 tax return handy, we want to discuss why a QCD (Qualified Charitable Donation) could be better than making a cash charitable contribution.

Infographic: over 90% of US taxpayers file their federal tax returns using the standard deduction
Over 90% of US taxpayers file their federal tax returns using the standard deduction

As we mentioned in the last post, over 90% of US taxpayers file their federal tax returns using the standard deduction.  They do so because the total of mortgage interest, real estate taxes, qualified medical expenses, and charitable donations fall short of the new standard deduction amounts which is $13,850 for single folks and $27,700 for those who are married and file a joint return.  If you are over age 65 you are able to get an additional $1,850 on top of the standard deduction.  So, unless you pay a lot of mortgage interest or give away a lot to charity you are probably utilizing the standard deduction.  If you file using the standard deduction the chances are pretty good that you are not getting any tax benefit for that cash donation or gift to charity, contrary to outdated beliefs.

Therefore, if you are old enough to be taking a required minimum distribution from your IRA accounts, you could divert some of that distribution to charity and you will not be taxed on the part that goes to the charity.  Only the part that you receive or shift over to a non-retirement account will be taxed.  So, let’s say you are paying federal tax at the 24% rate, use the standard deduction, and your RMD is $20,000.  Normally you would pay $4,800 in taxes on that distribution.  If, on the other hand, you donated one-half of the RMD ($10,000) to your church, you would save $2,400 in federal taxes!  The QCD option necessitates a shift in thinking about how you donate to charity and can mean some real tax savings over cash donations especially if you are in the upper tax brackets and file using the standard deduction.



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