Qualified Charitable Distributions

Qualified Charitable Distributions (QCDs) allow taxpayers age 70 ½ or older with traditional IRAs (not including active SEP or SIMPLE IRAs) to make charitable contributions directly from their IRA to a qualified charity (not a donor advised fund or private foundation) that will be excluded from their taxable income. This is especially beneficial for those who have to take required minimum distributions (RMDs) since Qualified Charitable Distributions from an IRA will count towards a taxpayer’s RMD. Therefore, utilizing QCDs gives those at RMD age the opportunity to satisfy their RMD requirement without incurring a tax liability.

 

For individuals age 70 ½ and older, QCDs can provide greater tax savings than typical charitable contributions reported on Schedule A of their 1040 since the distributions are guaranteed to be excluded from income even if the taxpayer cannot itemize their deductions. Traditional charitable contributions, including contributions to donor advised funds, are only useful to taxpayers who itemize their deductions. Even then, deductions are limited to 30% to 60% of AGI depending on the type of contribution (cash vs. non-cash).

 

In order for QCDs to be eligible they must be contributed directly from the taxpayer’s IRA to the qualified charity. They are only excluded from a taxpayer’s income up to $100,000 for single taxpayers ($200,000 for MFJ) per year.

 

Important to note, QCDs are not indicated as such on a taxpayer’s 1099-R, so it is imperative that any Qualified Charitable Distributions made throughout the year are properly documented by the taxpayer and communicated to their tax preparer.

 

To summarize, the steps for making a Qualified Charitable Distribution are as follows:

 

  1. Request a QCD withdrawal form from your financial advisor.
  2. The custodian will then process and transfer the distribution to the charity indicated.
  3. You will receive your 1099-R in the mail after year end.
  4. Specify to your tax preparer the amount of distributions on your 1099-R that are attributable to QCDs.

 

Please be sure to reach out to your Rockbridge financial advisor if this is something you would like to pursue.

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Bonus Depreciation Phase Out

When businesses purchase eligible property such as equipment, there are two options available to allow them to accelerate book depreciation, rather than write the asset off over the useful life. Under Section 179 of the Internal Revenue Code (IRC), the business may expense the entire cost of that piece of property in the year of acquisition, up to $1,220,000 in 2024, thus lowering the business’ taxable income. However, Section 179 depreciation cannot be applied in a year the business incurs a taxable loss, and would require a carry-forward.

 

As an alternative, a business may elect what is known as “bonus depreciation.” Bonus depreciation is a product of the Tax Cuts and Jobs Act of 2017 and allows businesses to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017 and before January 1, 2023. This is known as 100% bonus depreciation, it differs from the 179 deduction since the business is still eligible if they are operating at a loss. In addition, there is no limit on the amount of bonus depreciation a business may take in a given year. While the 100% write-off expired at the end of 2022, the bonus depreciation incentive still exists in some capacity as scheduled below:

 

  • Property placed in service in 2023 is eligible for 80% bonus depreciation.
  • Property placed in service in 2024 is eligible for 60% bonus depreciation.
  • Property placed in service in 2025 is eligible for 40% bonus depreciation.
  • Property placed in service in 2026 is eligible for 20% bonus depreciation.

 

This is a great tax planning opportunity for individuals who are partners/shareholders in a business that typically operates at a loss and are planning significant fixed asset acquisitions over the next few years. These individuals should try to accelerate any major asset purchases in order to be able to receive the maximum amount of bonus depreciation as it continues to wind down each subsequent year. Business owners who typically take advantage of bonus depreciation should be aware of this phase-out in order to avoid oversight on projected loss calculations for the next few years. Examples of common industries that may be affected by these changes include the manufacturing, rental real estate, and the agricultural industry. In addition, be sure to verify with your tax professional in regards to your State’s conformity with the Tax Cuts and Jobs Act as it relates to bonus depreciation.

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