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Qualified Charitable Deductions Part 2

Thank you all for the excellent discussion of QCDs. I was told by Fidelity that donor advised funds do not qualify.
An alternative is to create my own charitable fund. Legalzoom suggests it is not that hard. I am sure there are rules to follow and annual reports to file but once the first year is done, it shouldn't be that hard.
I could transfer funds into my charitable fund annually and then dole it out to established charities. This would count toward my RMD, avoid taxes and help charities.
What am I missing?
Frank
Reply to
FranksPlace2
Why do you think your fund would be ok for this purpose? I'd be near certain it would fall into the same category the Fidelity and Schwab accounts are in. The donate-your-RMD needs to be a completed gift to the end charity.
Reply to
JoeTaxpayer
FranksPlace2 writes:
Do you mean a private foundation? In order for a private foundation to meet the rules to qualify for QCDs, there are a bunch of hurdles which you probably don't want o have to cross - for example, it must meet the "conduit" rules and pay out 100% of contributions received in the given tax year (for which it is trying to qualify) by the 15th day of the third month after the close of that tax year, in addition to the normal 5%/yr distribution requirements.
Moreover, most private foundations are "non-operating" and their main purpose is making grants to other charities. Such private foundations are also not qualified for QCDs.
If you're going through all of this just to make QCDs, you are almost certainly working way too hard at it and it is very unlikely that you'll come out ahead.
I'm wondering what you're seeing - would you mind letting us know exactly what structure of "fund" you are taking about? Do you have a link to something on LegalZoom's site?
For folks with very substantial wealth, QCDs are not as much of an issue - they take their RMDs and they make their charitable contributions deductible on Sched. A, and they are done. And often they have appreciated assets to donate, thus doubly-avoiding taxes. With very substantial wealth, they may well be interested in the private foundation route.
For folks with moderate wealth, donor advised funds really are a fabulous and only recently widely-available tool.
But in neither case do QCDs really play well with them.
--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com
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Reply to
David S Meyers CFP
"I'm wondering what you're seeing - would you mind letting us know exactly what structure of "fund" you are taking about? Do you have a link to something on LegalZoom's site?"
Here is the link to Legalzoom to set up a 501c3:
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My goal is to give the money to charity without running it through my 1040. If I take the contribution as income, it increases my AGI which has negative consequences and, since I do not itemize, I can't take a deduction. A QCD solves that.
"Moreover, most private foundations are "non-operating" and their main purpose is making grants to other charities. Such private foundations are also not qualified for QCDs."
United Way and Catholic Charities have a main purpose of making gifts to other charities. I am sure they are ok for QCDs.
The IRS rules
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,,id=234258,00.html say it must be to a "Qualified Charity" but, based my limited research, do not define qualified charity beyond being a 501c3.
Evidently this QCD opportunity ends this year. It's not worth doing just for one year. But I think it is a legal option if I have no control of the non-profit.
Frank
Reply to
FranksPlace2
You present a not-so-common set of desires. From my experience, the QCD appeals to those who donate enough to make a difference, yet don't itemize. By "difference" I mean enough to make the savings worth it, a $100 donation hardly worth the extra paperwork. I understand QCD has a $100K limit, but also imagine most people who are looking to donate that much are already itemizers. So, with no supporting data, I imagine that the average sum that takes advantage of this rule is probably in the $5-10K range. Enough to be worth the effort, but not go through setting up a foundation to help the process.
As you mention, it expires again this year, unless our congress folk extend again. I tip my hat to you, for the fact that you are generous enough in your donations for this tax savings to be meaningful.
Reply to
JoeTaxpayer
As FranksPlace2 said, an increased AGI can have negative consequences, and these can occur regardless of whether the taxpayer itemizes or not. For example, Medicare premiums that some elderly taxpayers are required to pay are based on AGI (actually MAGI), and not on taxable income (post standard or itemized deductions). Similarly, taxability of social security income depends on AGI. Thus, given a choice between donating $X to a charity out of income included in AGI, and making a QCD (which can also be counted as part or whole against the Required Minimum Distribution (RMD) from an IRA), the latter might be preferable, especially if a reduction in $X from AGI would cause a reduction in Medicare premiums, taxability of Social Security income etc.
Dilip Sarwate
Reply to
dvsarwate
FranksPlace2 writes:
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In other words, you might consider what you're doing to be a public charity (and thus have gone 501c3 with it) but the IRS may differ. And the goals of the charity will likely be taken into consideration, too.
I don't think this will work.
I understand that. But you also seem to want to keep some level of control over the money - which the QCD restrictions were explicitly written to keep from happening.
They are. They are also not donor-advised funds, donors have no control whatsoever with respect to how the money gets used, and finally, they are fully public charities, not private foundations.
It might just work. I don't think so, and it's a risk I wouldn't take nor would I recommend it to anyone - if the IRS disagrees with respect to the classification of the charity as a public charity vs. a private foundation, the problems caused by that would be unpleasant.
I really don't mean to discourage you from your generous inclination to use QCDs to give to charity while maximizing the tax benefit to yourself. I commend you - no matter the tax benefit, you're still going to end up with less money in your own pocket at the end of this. I'm afraid that the easiest thing is simply to choose a couple of charities this year and make big donations directly to them if you want to take advantage of the QCDs. Or don't go the QCD route, give up some of the money to the government that you'd otherwise have saved, and donate the difference to a DAF. Charities will ultimately get a bit less from you this way, and the government more, but you still end up with the same cash in your pocket and you still get to have a little control over where (and when) the money gets distributed to the charities.
One perhaps underappreciated benefit to the DAF is that you no longer care about the "year-end drives" when everyone is trying to get you to make your contributions to this charity of that before the year-end so you can get the tax benefit. It's already had the tax benefit whenever you made the contribution, so if you have the DAF make a distribution in December or you make it in January, it makes no difference tax-wise whatseover. It's nice to not care about the timing anymore.
And that's another possibility - if you accellerate your giving - combine what you'll be giving to charity for the next couple of years into one contribution to a DAF, you may be giving enough to benefit from itemizing this year. Then next year and the year after (or whatever), just make distributions from the DAF instead of directly from your pocket. It's kind of like when folks prepay property taxes in alternate years so they itemize in one year, take the standard deduction in the next, and so on.
--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com
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Reply to
David S Meyers CFP
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This is the IRS requirement for the charity
"A QCD is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions."
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So if a would-be legalzoom application is approved as a non-profit, the charity would be qualified.
However I agree that I cannot control the charity in any way. Someone else would have to create and operate the charity.
Frank
Reply to
FranksPlace2

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