Wealth Management & Financial Planning

Wealth Management & Financial Planning

Recent Tax Changes That Could Impact Your Return

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Rarely does Congress deserve a thumbs-up regarding tax code changes in my opinion. Nevertheless, recent decisions to make some tax break permanent and extend others look like a good thing from my vantage point. Keep in mind that a permanent feature of the tax code requires a vote of Congress before it can be changed. In contrast, an extension allows taxpayers to continue taking the deduction for now, although the deduction is likely to change in the future. 

Getting politicians to agree is no simple feat!   Our favorite permanent deduction is the Qualified Charitable Contribution or (QCD).  This allows IRA account owners age 70.5 or older to direct their required minimum distribution to their favorite charity. We received several questions from my Consider This radio program listeners and friends asking why this deduction is good if the giver doesn’t get the charitable deduction.

Think about your tax return in three parts, although there are actually more. Page one beginning on line seven shows all of the income you earned during the year.  Earned income tells us if you are eligible to contribute to a retirement plan. Everything on page one – interest income, wages, capital gains income, business income, etc. – is totaled to determine how much of your Social Security income is taxable if you are receiving benefits and ultimately your adjusted gross income appears at the bottom of page one. Traditionally, anything that occurs above the adjusted gross income (AGI) line is referred to as “above line.” Anything after AGI is referred to as “below line.”

A simple rule to remember is that anything that reduces “above line” income is often better than anything that creates a deduction “below line.” It is true that if you use the QCD you will not be able to itemize that portion of your charitable contribution. The QCD keeps the income from your required minimum distribution off your tax return and could make less of your Social Security income taxable.  It clearly reduces your adjusted gross income.

Now if you were able to itemize, the QCD would eliminate your charitable deduction for the amount given via the QCD (this does not eliminate any other charitable contributions), but a deduction merely reduces the amount of your income that is taxed.  To clarify, as long as you are not in a 100% tax bracket, the reduction of income using the QCD trumps the itemized deduction.

Many of the families we serve only itemize on their tax returns because of the charitable gifts they make. Using the QCD will mean smaller itemizations than the standard deduction allowed by the IRS but may yield additional benefits on a taxpayer’s return.

The reality is that the tax code changes every year and will continue to do so. I taught my students at Purdue University that all tax policy is social policy. As more Baby Boomers move into retirement, expect more tax changes to arise that will impact this generation from various economic perspectives.

Tax advice provided by CPAs affiliated with the Financial Enhancement Group, LLC.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]

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