Charitable Contributions from IRAs
Did you know that, if you are at least 70½ years old, you can make tax-free charitable donations directly from your IRA? By making what's called a qualified charitable distribution (QCD), you can benefit your favorite charities, while excluding up to $100,000 annually from your gross income.
How QCDs work
In order to make a QCD, you simply instruct your IRA trustee (brokerage firm) to make a distribution directly from your IRA to a qualified charity.
The value of this type of IRA withdrawal is not taxable. However, it should be noted that while QCDs are not taxed upon being distributed, taxpayers are not allowed to also deduct the charitable contribution on their federal income tax return.
The value of this type of IRA withdrawal is not taxable. However, it should be noted that while QCDs are not taxed upon being distributed, taxpayers are not allowed to also deduct the charitable contribution on their federal income tax return.
QCDs count toward satisfying required minimum distributions (RMDs) that you would otherwise have to receive from your IRA, just as if you had received an actual distribution.
Although taking advantage of making direct gifts from your IRA may sound like a great idea, there are a few details you should be aware of, including the following:
Taxpayers must be over the age of 70 ½ at the time of the Qualified Charitable Distribution.
All, or part of the taxpayer’s required minimum distribution may be included in the charitable distribution.
The distribution must be paid directly to the charity from the IRA trustee. A gift to a donor advised fund would not qualify.
Because the distribution is paid directly to charity, there are no taxes withheld.
When making a Qualified Charitable Distribution, you are not allowed to also take a deduction for the charitable gift.
Why are QCDs an important tax saving strategy to consider?
Without this special rule, taking a distribution from your IRA and then subsequently donating the proceeds to a charity could be quite costly from a tax standpoint.
This is because the standard deduction is currently pretty high ($25,900 for married filers) and charitably inclined taxpayers could be unable to surpass the standard deduction in order to begin itemizing.
For those who are charitably inclined and over the age of 70 ½, here are a few of the major benefits:
Those who are normally not able to itemize their deductions (and not deduct charitable gifts), would avoid paying taxes all-together on the IRA distribution that is gifted to charity.
Total income would be reduced. As a result, the taxability of Social Security income may decline.
With the reduction of income, passive losses (from an investment property, etc.) may become more deductible.
For high income taxpayers, reducing income with qualified charitable contributions, could serve the purpose of reducing Medicare premiums.
Time is of the essence…
Please be aware that many financial institutions require more time to process QCDs than normal IRA distributions. If you have an interest in this strategy, we suggest starting the process soon (before October 1st)!
While we believe this gifting strategy can be a great idea for some, it is definitely not appropriate for everyone. If you would like to learn more about this gifting strategy, please contact us today.