Are your donors aware of all the options they have to support your organization? Most people know they can volunteer or write a check to the charities they wish to support, but they might not realize there is another way. The American Taxpayer Relief Act of 2012 extended the qualified charitable distribution provisions for 2013. This allows donors to donate directly from their IRAs to qualified charities. If you have donors who are age 70 ½, they are probably eligible for tax savings by donating to your charity directly from their IRAs.
How To Use This Information for Your Charity Proactive Charities will want to get this information to their donor base and potential donors as soon as possible. The provision currently expires December 31, 2013, so don’t delay.
- Review the information below and determine if you have contributors or potential contributors who are age 70 ½.
- Educate your donors and potential donors about this tax benefit. Include it in your next appeal letter. Suggest that they consult with their individual tax advisors regarding the tax benefit that may be available to them by making their contributions to your organization directly from their IRAs.
- Encourage your donors and potential donors who wish to do so, to contact their IRA trustees and provide transfer instructions as described below.
The Basics: IRA Required Minimum Distribution The IRS will not allow taxpayers to maintain retirement funds indefinitely. Once taxpayers reach age 70 ½ they must take required minimum distributions from their IRAs. You may have donors that do not need these distributions, and do not want to increase their tax by taking them. There is no way around taking the distribution, but there is a way to avoid the tax. Taxpayers who donate their distribution directly to a qualified charity may exclude the distribution from their income.
How Donors Benefit from Qualified Charitable Distributions
- The IRA distribution contributed to charity never hits taxable income. Required minimum distributions usually increase adjusted gross income, affecting taxable income in a number of ways. Higher income increases limits on itemized deductions. Higher income also raises the amount of social security benefits subject to tax. IRA distributions donated directly to charity are excluded from income. This results in a lower adjusted gross income, and possibly lower taxable social security benefits, and lower tax.
- The charitable donation income limits do not apply. Taxpayers are usually only allowed to deduct up to 50% of their adjusted gross income in charitable contributions. Donors who take taxable IRA distributions and then choose to make charitable contributions have to consider that those contributions are only deductible up to 50% of adjusted gross income. Donors who make their charitable contributions directly from their IRAs exclude the entire contribution from tax.
- There’s no need to itemize deductions to benefit. Taxpayers can only receive a benefit from charitable contributions if they itemize their deductions on Schedule A of their individual returns. However, an amount donated directly from an IRA can be excluded from adjusted gross income. In this case, if the donor does not have enough deductions to qualify for itemized deductions, they still get a benefit without having to itemize.
- If an individual has an inherited IRA and they have reached age 70 ½ then they can still take qualified charitable distributions from the inherited IRA.
How Donors Can Maximize Contributions A donor is allowed to exclude from gross income up to $100,000 for qualified charitable distributions made each year. Spouses may each contribute up to $100,000 for qualified charitable distributions from an IRA. Therefore on a joint tax return there could be a total of $200,000 excluded from adjusted gross income. If donors also contribute additional amounts besides those distributed from their IRA, those additional amounts may be included on Schedule A of the 1040 as charitable contributions. The additional contributions may not exceed 50% of their adjusted gross income without considering the $100,000 allowed for IRA distributions. Therefore, on a joint return an individual may exclude $100,000 for each spouse from their adjusted gross income for IRA distributions and then also contribute to charity up to 50% of their adjusted gross income.
How to Donate Donors should contact their IRA trustee and have them transfer the money directly to the charity. The trustee can issue a check in the name of the charity and allow the donor to deliver it to the charity. The distribution cannot be made payable to the individual, it must go directly from the IRA trustee to the charity.
Tax Reporting Donors will receive a Form 1099-R from their IRA trustee for distributions made in 2013. Qualified Charitable Distributions will be included in total distributions but will be excluded from taxable distributions. “QCD” should be listed next to the taxable amount so that the IRS is aware there are amounts that were excluded from tax as a result of a charitable distribution deduction.
Taxpayers will report total IRA distributions on the first page of their individual returns where it says IRA distributions (line 15a for the 2012 tax return) and the taxable portion will be listed on the next line. The taxable portion is the total amount of IRA distributions that were not donated to charity.
The charity should provide a receipt to the donor. The donor must keep this receipt with his or her records to support the contribution.
Summary If you have donors who are age 70 ½ they may be receiving required minimum distributions from an IRA. If they’re already contributing to your charity, it’s likely that you can save them some tax by suggesting that they make their donations directly from their IRA accounts. Proactive charities will want to get this information to their donor base and potential donors as soon as possible. Your donors will appreciate the information. The provision currently expires December 31, 2013, so don’t delay.
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