Over 70 ½? Have a traditional IRA? Give to charities? We have 3 words for you:
Qualified Charitable Distributions.
Most people give because they are passionate about a cause or they want to make an impact for good, not for a financial incentive. Nonetheless, if you desire to give, why not do so with money that you must take out anyway. If you are fortunate enough to not need all your required minimum distributions for living expenses, or if you are planning to give out of your normal expenses, you can avoid income tax on your required withdrawal by donating your money directly to a qualifying charity.
Let’s review the rules for qualified charitable distributions:
· You must be 70 ½ or older to make a tax-free charitable contribution.
· You must give from your IRA subject to RMDs, not a 401k or similar type of retirement account. Inherited IRAs are eligible, but SIMPLE IRA and SEP plans are excluded.
· If you are age 70 ½ or older, you can transfer up to $100,000 per year directly to an eligible charity; if you file a joint tax return, your spouse can also contribute up to $100,000 for a total of $200,000 from retirement savings excluded from income tax treatment.
· The charity must be a 501(c)(3) organization.
· The gift must be transferred directly from the IRA by the IRA trustee to qualify. If you withdraw it and later donate it, it will not qualify for a tax-free qualified charitable distribution.
· You must make the contribution by December 31.
So, for a retired individual or couple that is 70 ½ or older, own an IRA subject to required minimum distributions, and want to donate to charity, a qualified charitable distribution can be an avenue to preserve an income-tax-reducing charitable deduction under our new tax law.
Why make a qualified charitable distribution (QCD) instead of a normal charitable gift?
The new tax law will see fewer people taking advantage of itemized deductions such as mortgage interest and charitable gifts due to the doubling of the standard deduction possibly being a greater amount. If you do claim the standard deduction, you unfortunately lose any tax benefit from your charitable gift. With that said, a QCD will first count towards satisfying your required minimum distribution for that year.
Secondly, the distribution is excluded from your income, thereby reducing your taxes, which is a real benefit under the new tax law. And an additional bonus of using this strategy is it helps reduce your Adjusted Gross Income. This is important for several reasons. Your AGI determines the amount of your Medicare premiums in the following year, how much of your Social Security is subject to income taxes, and if you will be subject to the Net Investment Income Tax. Reducing your Adjusted Gross Income will help with each of these areas to lower overall income and/or taxes.
A few examples might help to clarify:
· Kathy, a single taxpayer, has reached 70.5 and is subject to a $25,000 RMD from her IRA for 2018. Her itemized deductions will not exceed $13,600 so she will use the standard deduction. She does not need all her RMD for living expenses and usually gives around $6,000 to charities each year. Kathy will make $6,000 in qualifying charitable gifts directly from her IRA and then take the rest of her RMD as a taxable distribution for herself. Kathy meets her full RMD requirement but will only owe tax on $19,000. She therefore receives the tax benefit of a $6,000 charitable deduction.
· John, a 71-year-old, has an IRA worth $750,000 as of December 31, 2017. His RMD for 2018 would be $28,302 based on the RMD table which requires the $750,000 to be divided by a factor of 26.5. John decides to use all his required minimum distribution to fund his charitable gifting. If John is in the 25% marginal tax bracket, he could avoid approximately $7,075 in income tax liability through giving.
As you can see, for an individual or couple who are in the 25% tax bracket, even a $1,000 donation can save $250 in taxes. You can also break up the donation and send it to multiple 501(c)(3) organizations. There are no IRS limitations on how many or how small the distributions may be to your favorite organizations if you provide the name, address, and other specific information for the charities.
There are other planning strategies for charitable gifts. It may be possible to bunch itemized expenses into one tax year to enable you to itemize in some tax years while claiming the standard deduction in other years. You may also be holding securities with large unrealized gains. By donating the securities to charity, you can benefit by avoiding capital gains, especially if you are able to itemize in that year.
A good plan can take your good intentions and create a winning strategy for you and your non-profit of choice!