Owners of individual retirement accounts who are at least age 70 1/2 can contribute some or all of their IRAs directly to charity. The motivation to do so is that it can be advantageous from a tax perspective in some cases.
If you have a traditional IRA, you must begin taking required minimum distributions (RMDs) when you reach age 70 ½, even if you neither need nor want the money.
When you take these distributions, they’re taxable at ordinary income rates, based on the tax bracket you’re in that particular year.
If you fail to take your RMD, you may be subject to a 50% penalty of the amount you were supposed to take as a distribution but didn’t.
A qualified charitable distribution (QCD) is a distribution from a traditional IRA paid directly to a qualifying charity. By making the payment directly to the charity, the account owner is not taxed on the distribution, even though it satisfies the need to take the RMD.
The new tax law passed in December 2017 nearly doubled the standard deduction while also eliminating many itemized deductions. Although the charitable deduction still exists, it is an itemized deduction, and total itemized deductions must exceed the (increased) amount of the standard deduction to provide any tax benefit. So, many taxpayers will not realize any tax benefit from making charitable donations.
The QCD can be used to realize a tax benefit from a charitable donation, even with the limitation on itemized deductions and the increased standard deduction.
Example: Retired clients both aged 70 ½, with limited itemized deductions, have no need for their $14,000 RMDs, and would instead like to make a $14,000 donation to charity. Because of the increased standard deduction, they would not be able to deduct a charitable donation for tax purposes.
But, if they choose to make a QCD and have their RMDs paid directly to a charity, they will realize a tax benefit.
Scenario A: No IRA RMD to Charity
Standard Deduction: ($24,000 plus $2,600, or $26,600, because they are over age 65)
Taxable Income: $123,400
Federal Tax Owed: $19,027
Scenario B: IRA RMD to Charity
Income: $136,000 (their income excludes the RMDs paid to the charity)
Standard Deduction: ($26,600)
Taxable Income: $109,400
Federal Tax Owed: $15,947
Tax Savings: $3,080
Note that the maximum amount that can be donated through a qualified charitable distribution is $100,000 per year per IRA owner.
This article is not intended to provide tax advice. You should consult with your personal tax advisor.
PLEASE SEE important disclosure information at www.springwaterwealth.com/blog-disclosure/.