New Tax Law Favors Charitable Giving from IRAs

Since the new Tax Cuts and Jobs Act has doubled the standard deduction starting in 2018, few individuals are expected to itemize.  However, if you are an IRA owner over age 70 ½ and have a charitable intent, you can utilize Qualified Charitable Distributions (QCDs) to maximize the new higher standard deduction, in effect getting the standard deduction plus the charitable deduction.

Making a QCD as opposed to a normal charitable gift has two main advantages. First, a QCD counts toward satisfying an individual’s Required Minimum Distribution (RMD) for that year. Second, the distribution is excluded from the taxpayer’s income. It is this second benefit that really shines under the new tax bill.

The QCD only applies to IRA owners and beneficiaries who have already reached age 70 ½ or older. The donation must be directly transferred from the IRA to the charity and nothing can be received in return for the donation. Gifts to Donor Advised Funds or private foundations do not qualify. Total annual QCDs from all IRAs cannot exceed $100,000 per person, per year.

In addition, to the extent that the IRA owner had an RMD obligation for the year, the QCD is deemed to satisfy the RMD, even though the QCD is not taxable as an RMD otherwise would have been. One very important caveat of using a QCD to satisfy an RMD obligation is that an RMD is presumed to be satisfied by the first distribution that comes out of the IRA for the year. If you are considering this tactic, be sure to give to charity first!

The QCD is not included in the IRA owner’s gross income. Thus, the distribution does not increase gross income for purposes of determining such things as taxability of the IRA owner’s Social Security benefits and the IRA owner’s Medicare Part B premiums.

The IRA provider will report these as distributions to the owner from the IRA. The Form 1099-R it files with the IRS will have no mention of “QCDs” and no hint that the distributions are not taxable. It is up to the IRA owner on their personal tax return (Form 1040) to report the gross distribution and report the taxable portion as zero, writing “QCD” in the margin next to line 15b.

If you would like to hear more about this opportunity to benefit from this important tax saver, work with your financial advisor and tax professional.

 

Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein.
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February 2018 Market Letter

 

“Giant steps are what you take

Walking on the moon

I hope my legs don’t break

Walking on the moon

We could walk forever

Walking on the moon

We could live together

Walking on the moon”

We go back to 1979 for one of the greatest hits by Sting and The Police. I was reminded of this song while I watched President Trump take a victory lap during his first State of the Union address.  Certainly, the stock market has been breathing rarefied air since his administration began. Although he cannot take full credit for equity performance (stocks were doing fine during the Obama Presidency and the economy was improving), some of his economic policies have added fuel to the fire. The combination of deregulation, tax reform, and plain old animal spirits has been a potent aphrodisiac for the market.

January has continued this seemingly inexorable upward trend. As reported on CNBC, the Dow Jones Industrials and S & P 500 had their best month since March 2016, and the NASDAQ had its best positive move since October 2015. Momentum has been from lower left to upper right, and the Yellow Brick Road seemingly still leads to the Emerald City. Let’s look under the proverbial hood a bit to see why this trend has marched forward and whether it’s likely to be sustained.

We’ve been harping on the same themes for quite some time. Quarterly earnings this cycle have been solid. We mentioned in our last missive that corporate tax reform is estimated to add between 8.5 and 11.5% to the party, thus allowing for a further expansion in price-to-earnings multiples. Interest rates remain historically low. Investors are optimistic, and there’s still plenty of retail cash sitting on the sidelines. The “FOMO” (Fear Of Missing Out) mantra underlies the playing field. The wealth effect of higher equity accounts has led to increased consumer confidence. What’s not to like?

Well, I’m finally seeing some canaries in the coal mine. Tuesday’s decline of over 360 points on the Dow was the first 1% decline in 112 days. The length of that stretch tied a record from several decades ago. It came on the heels of a Monday that displayed a sharp reversal from Friday’s upward leg. The Volatility Index, or VIX, reached a level on Tuesday not seen since last August, signifying short-term anxiety that has been largely absent. Many pundits are nervous about the yield on the ten year Treasury creeping up. It’s now over 2.7%, and with the Federal Reserve poised to raise rates three or four times in 2018, that trend should stay intact. This is important since the safety of a government-backed yield can return to a competitive level with stock dividends. Value stocks could be negatively impacted, but I feel that the yield needs to exceed 3% for the flight to bonds to get legs.

Other flies in the ointment include a slight increase in inflation. Crude prices have been in stealth mode, rising from the mid 40’s to the mid 60’s per barrel. This hasn’t been reflected too much in gasoline prices yet, but we’re in a fallow period for auto travel. Other commodities have performed in a bullish manner, with gold having a particularly solid month. Remember that the psychology behind gold is one of a “safe haven”, and maybe this is a harbinger for the future. Although few pundits are discussing this point, I’m worried about Treasury Secretary Mnuchin imploring Congress to raise the debt ceiling. Tax reform has been pegged to add 1.5-2 trillion dollars to the deficit, and it appears as though President Trump’s infrastructure plan could have debt ceiling impacts as well. It’s eerily reminding me of the second Bush Presidency’s “compassionate conservatism”, which turned out to be neither in the end. In expressing adulation or simply caving legislatively to President Trump, Congressional fiscal hawks have been silent.

We’ve said many a time that equities are long overdue for a correction. A 5% downward move would be both healthy and normal for a market in a secular bull cycle. We’ve come a long way in a relatively short period. A pause that refreshes should be in order. That being said, I still feel good about equities, even at these lofty levels.  Macroeconomic conditions, both in America and around the world, continue to improve. Tax reform and infrastructure, while deficit unfriendly, should have a positive effect on corporate earnings. Let’s also not forget all of the cash that’s going to be repatriated from overseas by multi-national corporations. Whether these dollars are used for share re-purchasing, increased dividends, capital expenditures, mergers/acquisitions or added jobs, the story for these companies seems to be getting better.

All in all, we hope to continue walking on the moon. We may have a roadblock or two along the way, and we’ll be watching portfolios for those signs. In the meantime, enjoy the January good beginning.

Now, a word about our new arrangement. The transition with W3 is going smoothly thus far, and we are confident that it will continue to do so. I can assure you that there will be no change in level of service. We’re already seeing synergies that will be accretive for everyone. It’s an exciting time… perhaps an end of the Schiffman Grow era in name, but a new beginning as W3. It’s great to be partnering with a like-minded firm.

Thanks as always for your continued trust and support. I look forward to talking with you soon.

Sincerely,

Bill Schiffman

Registered Representative

The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.  Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.