Since 2006, individuals age 70 ½ or older have had the opportunity to direct up to $100,000 of required minimum distributions (RMDs) from their IRAs to the charities of their choice. Unfortunately, this rule is not widely known. First, the $100,000 amount sounds as if this provision is only for the rich. That is not the case as explained below. Second, this is one of those tax rules that expired each year and Congress resurrected late in the tax year or the year following making it retroactive. Tax planning works all so much better when the tax laws are known before the tax year expires. The good news is that this tax provision has now been made permanent.
Let’s look at a very common scenario. Some retirees have paid off their mortgages and thus have no mortgage interest to itemize on Schedule A of Form 1040. These persons often find themselves in the position that they are better off claiming the standard deduction rather than itemizing their tax deductions. If they make charitable contributions, this means that they did not receive any tax savings for their charitable gifts. These persons need to understand that they can continue to claim the standard tax deduction PLUS receive a tax benefit for their charitable contributions.
If you find yourself in the above scenario, let’s look at who can take advantage of this special RMD tax rule called “qualified charitable distributions” (QCDs). First, you must be at least 70 ½ years old and are required to take distributions from a traditional IRA. You then contact the trustee or custodian of your IRA account and request that a QCD be made directly from your IRA account to a qualified charity. If you are married, you and your spouse can each make up to $100,000 of QCDs. Again, while $100,000 is the maximum amount, lesser dollar amounts also qualify. Thus if you wish to make a charitable contribution to your favorite charity of $2,500, you can do so and receive a tax benefit. Keep in mind that only contributions to a qualified charity qualify which disqualifies private foundations and donor advised funds.
What is the tax benefit of doing a QCD? When you make a RMD, under normal circumstances it is included in your taxable income meaning that you are paying income taxes on the distribution. When you make a QCD, the distribution is coded by the plan administrator or fiduciary as being a non-taxable RMD. You can also split the RMD meaning that a portion of the RMD can be used for a QCD and the remainder can be sent to you as a normal RMD. The QCD portion counts towards your RMD requirement.
Similar to claiming any tax deduction, you must have substantiation to support your tax reporting. Accordingly, the charity must send you a written acknowledgement of the gift.
There are potential additional tax benefits associated with QCDs. The retiree is likely receiving Social Security benefits and the QCD is not included in the taxpayer’s AGI (adjusted gross income). Thus, it is possible that a lesser amount of the retiree’s Social Security benefits would be taxed and premiums paid for Medicare Part B and D could be less.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
