How to Turn Your RMDs into Charitable Gifts and Save Taxes

Charitable Giving iStock-1002362042.jpg

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!


A Time of Thanks and a Time of Giving

Give - iStock Photo

by Allyson Hauss

Can you believe it is almost time for the holidays? We will soon be eating turkey and making gift lists for family and friends. And don’t forget decorating and planning parties. I can almost smell gingerbread cookies, a crackling fire, and fresh cut pine trees!

It truly is the most wonderful time of the year – and a great time for giving! Whether we are giving of our time or resources, the holidays bring out the giver in all of us as we look for ways to help our neighbor or be a blessing to those in need.

The most rewarding benefit of charitable giving, of course, is the joy of contributing to a good cause, a strong belief, or a great need. But there is an extra bonus in charitable giving when that gift can also reduce your federal and state income tax, reduce your estate tax, and/or possibly reduce or eliminate capital gains tax.

For purposes of charitable giving, charities are classified as public or private, and there are deduction limits determined by the type of charity and the type of property. Keep in mind, however, that you must itemize to deduct a charitable gift, and only contributions made to qualified charitable organizations qualify for an income tax deduction. In addition, the gift must be made prior to the close of the taxable year for the gift to be deductible in that year.

If a charitable gift is made in cash, the amount of cash given is the deductible amount of the gift, up to 50% of the donor's adjusted gross income (AGI). The rules for gifts of other kinds of assets can become a little more complex. One of the more common options includes gifting appreciated stock. The charity receives the full market value of the gift, the donor receives a charitable deduction - and avoids long term capital gains!

When a gift of tangible personal property or real estate is made to a charitable organization that will use that property in their charitable function, the deduction for income tax purposes is generally the fair market value of the property on the date of the gift. If the property is subject to depreciation recapture, the fair market value is reduced by the potential depreciation recapture on the asset. The IRS has many rules covering income tax deductions for charitable contributions by individuals, which is why it is important to be knowledgeable as you choose where and how to give. IRS Publication 561 Determining the Value of Donated Property and IRS Publication 526 Charitable Contributions are great resources and a good place to start.

Concerning gifts to family and friends, every person may gift transfer-tax-free per donee up to the annual exclusion for the year, which for 2017 is $14,000. This means you can give up to $14,000 to as many related or unrelated people as you would like each year. So, if you have 2 children and 5 grandchildren, you can gift $98,000 in tax free-gifts this year. As a married couple, you can double that amount to $196,000 with each spouse giving half!

You can also make a tax-free gift by making a payment for qualified medical expenses or tuition for someone else. You must pay the qualifying medical care provider or educational organization directly to qualify for the exclusion, but what a great way to give a much-needed gift this season. Contributing to a 529 education savings plan is another great way to give the gift of education! 

Giving and gifting – so many choices! What a wonderful time to celebrate in a purposeful way as the leaves change and the cold weather moves in!

Remember that however you decide to give or gift as we quickly approach the holidays, it is best to have a plan. Each person is unique, and your financial plan should be driven by your values and what is meaningful to you and your loved ones. Your tax advisor and financial planner can help assist and guide you to determine the wisest way to achieve your giving goals that will bring joy to you and your family, bring hope to those around you, and be an integral part of your overall financial plan.


This article is for information purposes only and does not constitute a recommendation.