In the act of giving to charity, the reward can be both intrinsic and extrinsic. Charitable giving may be done through a variety of means, such as a direct contribution of cash, personal property, or investments. Another avenue for helping a favorite charity is to give money directly from an Individual Retirement Account (IRA). If you already plan to give, this path may be advantageous to you.
Required Minimum Distributions
Retired taxpayers are required by law to take withdrawals, known as Required Minimum Distributions (RMDs), from their retirement plans. This limit is in place for taxpayers over 72 years of age. Because traditional IRA contributions are often pre-tax, IRA distributions are taxed as ordinary income. A way to reduce this tax burden is to donate the money to a qualifying charity directly from an IRA. This is called a Qualified Charitable Distribution (QCD).
Qualified Charitable Distribution
What are the rules governing a Qualified Charitable Distribution? First, the distribution must originate from a traditional IRA, not a Roth or 401(k). Also, the money must be transferred directly from the retirement account to the charity of choice, which must be a qualifying charity. Only taxpayers older than 70 ½ may take advantage of Qualified Charitable Distributions. The limit per taxpayer is $100,000. If you are married filing jointly, you and your spouse together have a $200,000 limit.
Benefits of a QCD
As a result of the distribution, the taxpayer reduces the amount he or she is required to withdraw; therefore, the taxpayer has less taxable income. Excluding the charitable contribution from income through a QCD has essentially the same effect as deducting the charitable contribution. Additional benefit may come to taxpayers who do the majority of their giving by utilizing the QCD, but then take the standard deduction on their returns—as the QCD income offset is available without requiring itemized deductions. Further, cash charitable contributions are limited to 60% of a taxpayer’s adjusted gross income, but QCDs break that mold.
Below, you will see two simplified scenarios with and without a QCD. The taxpayer has an RMD of $110,000 and wanted to contribute $30,000 to charity. In the first scenario, the taxpayer uses a QCD to exclude $30,000 of income and to utilize the standard deduction. This results in a lower AGI and a reduction of taxable income. In the second scenario, the taxpayer earns all the income, but utilizes the itemized deduction. This results in a higher AGI and tax because of losing out on the standard deduction.
If you are over 70 ½ and will make a distribution from your IRA, there is a possibility to reduce your tax burden. Before engaging in this or any other tax-saving opportunity, you should always be aware of the rules and regulations in detail. If you have questions about this information, or about any matter involving tax planning and strategy, one of our executive contacts would be happy to assist. You may email them below, or call (800) 270-9629.