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Reducing Taxes with Charitable Contributions - Use your IRA and Save Taxes at age 70 1/2 - YouTube
Channel: Martin James, CPA - Tax Jiu Jitsu
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hi marty james here i want to talk to
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you a little bit about charitable
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contributions
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and how they actually relate to your
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iras especially if those people hit 70
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and a half
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so back in the day which wasn't too long
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ago this was
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when required minimum distribution
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started at age 70 and a half
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they also put in this thing called a
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qualified charitable distribution
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um and it really makes sense to do this
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with your ira money
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i'll explain that a little bit more here
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but
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when the secure act passed they took the
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required minimum distribution age
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from 70 a half up to age 72
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but they did not change the eligibility
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to do
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qualified charitable distributions they
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those stated 70 and a half
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now you cannot make these deductions
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before you know so say i'm
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70 and a quarter i can't do it but just
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as soon as i hit 70 and a half
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i can't so that year that i turned 70
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and a half i may want to delay my
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uh charitable contributions until i do
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hit 70 and a half
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so essentially what happens is you know
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you instruct your
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custodian to send the money uh for your
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charitable contributions directly to the
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charities
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now they can do this in a couple
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different ways one they can send it
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directly to the charity
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or they can send the check to you made
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out to the charities so you can put it
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in the plate you know on sunday morning
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but essentially what's happening is you
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take this money so i put my money into
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my ira
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you don't want to do this with a roth by
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the way you only want to do this with a
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pre-tax
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type retirement account so i i put this
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money in this
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retirement account and i tax deducted it
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so now when i take it out i want to pay
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taxes on it so it shows up on the front
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page of my tax return
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and then of course when i turn now 72
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the irs
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is going to tell me that i have to start
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taking money out well
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if i can direct this money directly to
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the chair missing out on taxes you know
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on this because what happens is it's not
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included in my income now i don't get it
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deducted on my charitable contributions
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on schedule a for itemized deductions
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but with chip with standard deductions
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for a lot of clients right now
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they're just taking the standard
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deduction because of the limitations on
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how much we can deduct for state and
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local income taxes being capped at ten
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thousand dollars so it really takes your
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uh either mortgage interest and uh
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combination insurable contributions get
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you over that
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so it's very effective to do this
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and one of the neat things with this is
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if let's say i'm required to take ten
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thousand dollars out of my
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ira because i'm now 72 and if i take
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that ten thousand dollars
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and have it directed out of my ira
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now i'm getting my full deduction for my
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standard deduction and i didn't have to
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spend any money to do that
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i'm actually not having to include money
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for my ira distribution
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in my taxable income because this qcd
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actually qualifies to help me meet my
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required minimum
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distribution for the year now
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the the thing that you you know you just
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really need to be doing this and i'll
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show you an example what the actual tax
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savings are you know for this when i get
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back to my office
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but even for for younger people who are
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not 70 and a half i mean you need to be
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talking to your parents about it because
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hey i'd rather inherit the good stuff
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you know the cash the things that's
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already been taxed
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rather than their stinking ira that's
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got all these taxes that i'm going to
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have to pay
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so you really need to be talking to your
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parents your grandparents about this
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thing
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because if they're not doing it it helps
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them it's definitely going to help you
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with that hey just you know when you get
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a chance
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before you get off this be sure you uh
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subscribe to this channel because you
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know we have a lot of ideas we're
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pumping out that you may not be getting
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somewhere else
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okay let's look at why you know we want
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to be doing this qualified charitable
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distribution you know from our ira when
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we're 70 and a half
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one thing i didn't mention was that you
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know how much can you do
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and you know each person can do a
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hundred thousand dollars out of their
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individual ira per year
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uh so have a married couple that could
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be 200 000 but it has to come out of
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each one of your
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ira you know one spouse has all the
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money the ira i'm stuck with with the
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hundred thousand dollars so
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we have actually you know done this in
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situations where
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we've taken much larger amounts out than
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what your normal annual
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charitable contributions are example was
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we had a client that had a will
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that said that hey i want 75 000
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to go to the church when i pass away and
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so in the will
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was you know or in her estate basically
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uh is all this good stuff that was going
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to step up in basis and the kids are not
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going to pay any taxes
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uh you know when she passes away however
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we had this ira out here
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that when she passes away the kids are
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going to pay taxes on that when they
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start taking money out
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so since charities don't pay taxes on it
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what we did
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is we took that provision out of the
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will
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church is no longer get 75 000 but but
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what she did is she did a 75 000
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qcd qualified charitable distribution
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of 75 000 directly to the church and
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now the kids are going to inherit less
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money that's
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tax infested in that ira and get inherit
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all the good stuff without having to
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give that to the church who doesn't pay
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taxes anyway
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and the other outcome to that was that
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you know we had the charity got the
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money earlier and
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then now her required minimum
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distributions are going to be lower
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which is going to control her tax
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bracket a little bit more going forward
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so here we have a situation where i have
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a married couple
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they are 72 so they're taking required
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minimum distributions now
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and that that amount i've got that
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pegged in at twenty five thousand
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dollars
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but they also make fifteen thousand
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dollars annually in charitable
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contributions
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so under alternative one you can see
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here
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this is whether they're taking their
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required minimum distributions out of
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twenty five thousand dollars
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and then they're paid writing checks to
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the to the church
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uh fifteen thousand dollars you know a
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year directly out of their bank account
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in alternative two here we have where
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they're directing 15 000
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out of the ira to go directly to the
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charity and of course that can happen in
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two ways you know
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we can send it directly to the charity
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or we can make it
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check out to the charity send it to to
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you and you can put it in the plate on
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sunday if you want to
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the the other
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ten thousand dollars is actually coming
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out as required minimum distribution is
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going to land on the front page of the
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return
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and that's the difference in the the
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total income here sort of there's
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there's more
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moving there because you can see that's
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more than a uh
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a 15 000 difference now both
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you know in both scenarios we're taking
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the standard deduction which they
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increased you know a few years ago
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substantially got rid of our personal
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exemptions
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so it's 27 800 here you know by taking
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my rmds and it's 27
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800 here by doing the qualified
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charitable deduction
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so buried in this alternative one
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scenario in that 27 08 i
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would be trying to deduct my fifteen
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thousand dollar charitable contribution
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but because i don't have enough state
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and local income taxes my medical
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expenses thank goodness are not that
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high
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i don't get over uh that 27 8 so i just
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take it
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here i've just taken the 27
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8 i don't my charitable contribution is
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not in there
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and i'm actually effectively getting
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kind of like a double deduction here
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so what happens is when we look at our
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actual tax
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difference here you can see that
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you know under the scenario one where i
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take the 25 000 put it on front
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page of my return then write the checks
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to the church it's fifteen thousand
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eight twelve
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here where i take it directly out of my
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ira it's ten thousand
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one sixteen so it's a substantial
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savings as a matter of fact it's
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38 percent of that fifteen thousand
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dollar contribution
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which is you know pretty good so you
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know how do we get there
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let's look at their income so we have uh
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fifteen hundred in interest which is
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taxed at regular ordinary income tax
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rates
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i have qualified dividends of two
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thousand dollars which are actually
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taxed at capital gains rates which would
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be like fifteen percent
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and i have capital gains distributions
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from mutual funds
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of eight thousand dollars uh here's my
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ira distributions there's twenty five
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thousand
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but then here's only ten thousand
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because i put fifteen thousand directly
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to the charity
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i have thirty seven thousand dollars in
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pensions
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and my social security benefits i still
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get the same gross amount but you can
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see there's a different amount being
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included in my income i'll show you how
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we get to that
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so that's where my my total income
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starting point
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is there my adjusted gross income i have
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no adjustments
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you know it's 125 and 103
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so when we look at the retirement income
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you can see there's my 25 000 ira
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distribution for my rmds
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then here's my 10 000 rmd
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and that 15 000 again went direct
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directly to the charity
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so what does that do my social security
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benefits are sixty one thousand six
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ninety four as a gross amount um
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so that's the same in both scenarios but
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because of the calculation of what we
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call
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provisional income uh you know how much
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of our social security benefits
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are taxable we can pay taxes on up to 85
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percent of it you know sometimes it's
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like 50
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and sometimes if my income is low enough
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it's zero so
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in this calculation i actually take
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where my taxable social security
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benefits by putting that 25 000 on the
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front page of my return
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raises my that provisional income
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calculation so now
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52 000 goes into the tax calculation
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for my tax return in that scenario here
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by getting that 15 000 off uh by going
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directly to charity
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my provisional income is lower so i'm
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only including 44 000
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in now let's look at the
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the actual kind of analysis of this
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so you see here under scenario one i'm
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in a marginal rate of 22 percent
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scenario two where i did the qcd i'm in
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a 12
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bracket okay so that means that next
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dollar that i earn
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is taxed at 12 but because of the
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taxation of social security here
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it's a little better than that
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so if we see how we blend through the
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tax brackets here
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i have uh 10 rate and then 12 percent
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and then i have seven thousand nine
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ninety dollars being taxed
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at uh 22 percent uh
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here where i did the qcd i have nothing
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in the 22
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bracket all my ordinary income is being
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taxed at that 12
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bracket but then when i drop down here
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you can see
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um by putting that rmd
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directly you know on my tax return that
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20 extra 25 000
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worth of income i'm paying 10 000 on my
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qualified
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or i'm including uh capital gains taxes
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on that 10 000 which is 2 000 for my
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qualified dividends and that 8 000 in
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capital gains distributions
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so my capital gains taxes is fifteen
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hundred dollars
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here because i'm now into that twelve
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percent bracket and i got it low enough
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that uh that ten thousand dollars is on
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it's tax-free for federal purposes i'm
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not paying any income taxes on it
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so when we look at
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uh you know how that works i mean
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basically we have a
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tax savings of 5696
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just by shifting all i'm doing is just
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moving where the
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how the money's moving out of my ira
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this is something that
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everybody who's 70 and a half that makes
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charitable contributions
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really needs to be thinking about and
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needs to be doing because even
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income levels lower lower it can work
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it really and the amount of money that
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you actually save depends on all these
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other moving parts
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you know we'd love to run these numbers
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for you to show you what it would look
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like but
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it's something that you just don't miss
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this we're still seeing people miss this
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and and you know a lot of times
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financial advisors don't bring this up
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to their clients because
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uh honestly you know i think some of
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them are thinking okay
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if they're giving doing 15 and i'm being
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paid you know let's say on a
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a fee basis type thing assets under
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management i'm sure that they might be
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thinking
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you know that hey you know i'm getting
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paid on this fifteen thousand dollars
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still in here
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and if i send them out i'm not gonna get
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paid anymore uh
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you know let him spend the other money
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and so a lot of advisors just don't
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bring this up of course a lot of
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advisors don't look at your tax return
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for ideas so like i said you know
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everybody needs to be looking at this
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when you turn 70 and a half now you
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cannot do this until you're 70 and a
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half
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but you know just so you might want to
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delay those
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uh the year that you turn seven you have
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delay your charitable contributions and
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then start
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you know and make that up um but yeah
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again
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just you know consider this and you know
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reach out to us
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you know drop us an email give us a call
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and
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you know we'd be happy to show you how
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this actually works
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