Your charitable donations make good things happen in the world. Although you’re not expecting a reward, a tax deduction makes it easier to give. Individual taxpayers who have reached age 70 ½ and give regularly to charity, may be able to save, by donating directly from their IRA accounts.
If you have IRA accounts, and you’re at least age 70 ½, you know about the required minimum distribution (RMD). You must withdraw a certain amount of money each year, and pay tax on it. What you may not know is that you can use your RMD to make contributions directly to your favorite charity and avoid tax by making a qualified charitable distribution.
A qualified charitable distribution (QCD) from your IRA is a great way to help others and reduce your tax bill. Generally, a QCD is an otherwise taxable distribution from a qualified IRA owned by an individual who is at least age 70½, that is paid directly from the IRA to a qualified charity.
The IRS has declared that charitable donations made from one of your IRA tax-deferred accounts will be exempt from taxation for any amount up to $100,000 as long as the distribution comes from a qualified account, and is donated to a charity that meets the IRS stipulations. A married couple may contribute $100,000 each, up to a maximum of $200,000. In addition, a QCD will also count towards a taxpayer’s annual required minimum distribution (RMD).
How is this different from just taking an IRA distribution, paying tax on it and deducting a regular charitable contribution?
Some taxpayers may not itemize their deductions.
When most taxpayers receive the benefits from the new Tax Cuts and Jobs Act, fewer and fewer people will be itemizing deductions on their tax return. The new standard deduction amounts for taxpayers over 65, are $26,600 for married filers, and $13,600 for single filers, and several of the deductions allowed in the past are now limited.
If you are required to take a RMD, and are over 70½, a QCD will provide a tax break even if you don’t itemize, and you will still be giving to your favorite qualified charity. You will not receive a charitable deduction, but if you now fall in the standard deduction category, this really doesn’t matter. You’re already getting your full standard deduction, and your IRA RMD is tax free.
Donors have income limits.
Starting in 2018, a donor’s charitable deduction can’t be more than 60% of the donor’s taxable income for the year. Let’s say a donor has little taxable income, but wants to make a major gift from savings. The donor takes a taxable IRA distribution of $100,000 and gives it to charity. With taxable income of $100,000, the donor’s deduction is limited to 60% or $60,000. The rest will be carried forward, but the donor is still left paying tax.
Change that to a $100,000 qualified charitable distribution directly from the IRA to the charity, and voila! No income. No deduction. No tax. The QCD bypasses the income limit.
More important information:
A QCD can be any portion of the annual distribution, as long as it is paid directly to the charity.
Remember: you can’t take the cash out of your IRA and put in your bank, and then write a check to your charity. That won’t work. If you do that, your IRA distribution would be taxable. It has to be transferred directly from your IRA to the charity through the trustee of the IRA.
The qualified charitable distribution rules used to be temporary, but they’re now permanent and can be a helpful tool for your overall wealth management strategy. Contact your tax advisor to discuss how making a qualified charitable distribution will help minimize your tax bill and benefit your qualified charity of choice.
We are providing this information for educational purposes only. Discuss your specific facts and circumstances with your tax advisor to find out how this information will affect you.
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