Don’t Overlook Gifts from IRAs

Even though IRA owners can now postpone required minimum distributions until age 72, charitable gifts can still be made from IRAs beginning at age 70½. These qualified charitable distributions (QCDs) are free from the income tax that would otherwise be owed when funds are withdrawn from an IRA, resulting in tax savings even though no charitable deduction is allowed. For example, Harold, age 76, has to withdraw $65,000 from his IRA this year. In his 32% income tax bracket, he will pay $20,800 in taxes on the distribution. If he instead directs the IRA custodian to send $15,000 to charity, his income tax drops to $16,000. This is especially important to Harold because he does not itemize on his tax return and otherwise gets no benefit from his charitable gifts.

Keep in mind a few rules for QCDs:

  • The funds may come only from an IRA, not a 401(k) or another qualified retirement plan.

  • Donors may give up to $100,000 annually to charity through QCDs.

  • Gifts must be made to public charities, not to donor advised funds or private foundations.

  • QCDs must be completed by Dec. 31 to qualify for 2022.

  • Donors may receive nothing in return for their gifts, although the QCDs can satisfy outstanding charitable pledges.

  • Gifts must come directly from the IRA custodian. Donors should not take withdrawals and then make charitable gifts, although donors with checking privileges on their IRAs can write checks to deliver to charity.

  • If you are still working and making deductible contributions to IRAs after age 70½, the ability to avoid income tax on QCDs is reduced.

Review Estate Plans in Light of Market Decline

The Dow Jones is down significantly since it hit 36000 on Nov. 2, 2021. A swing in the stock market may be a signal to revisit your will and other estate planning documents. For example:

  • Arthur’s will contains a specific bequest of $250,000 for his granddaughter, with the remainder of his estate passing to his three children. With the recent drop in the stock market, the value of each child’s interest has dipped, while the granddaughter’s share remains at $250,000.

  • Lorraine plans to leave 10% of her estate to her favorite charity to fund a particular program.

The drop in stock values means that her bequest would be insufficient to meet her goals. Ask your attorney about ways to ensure that assets pass as you wish, regardless of market changes.

Inflation Takes a Toll on Nest Eggs Too

It may not be as noticeable as at the grocery checkout line or the gas pump, but inflation can take a toll on retirement savings as well. The purchasing power of cash is reduced when inflation rises, particularly if the earnings on the investments don’t keep pace with inflation. The chart shows how much $50,000 will be worth in terms of today’s buying power, assuming 4% inflation:

Number of years

Value of $50,000 in future

5

$41,095

10

33,780

15

27,765

20

22,820

An Easy Tax Refund

With travel opening up again and the dollar strong against foreign currencies, many Americans are planning trips abroad. There may be a way to cut the cost of souvenirs and gifts purchased during your travels. Many European countries levy a value-added tax (VAT)—similar to a national sales tax—on the price of goods.

The tax, which may be as high as 25%, generally does not apply to tourists, but because the VAT is included in the sales price of the item you purchase, you will have to apply for a refund. To do this, simply ask for a form at the store and have it validated by a customs inspector when leaving the country.

In some cases, the refund will be issued immediately. In others, you will need to send the validated refund form back to the store where you made your purchases. Some countries set minimum amount for VAT refunds, and some stores have even higher minimums, so check with the store before making your purchases. Where possible, do your shopping at one or two stores. VAT refunds generally are not available for hotel stays or for restaurant meals.

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