Give to Charity from your IRA - and Pay LESS Taxes

Do you contribute to your church or another charity annually? Do you have an IRA? Are you 70.5 years or older?  If the answer to all these questions is yes – please read the remainder of this article – because I will explain how you can save thousands of dollars in taxes in the future!

 Changes to Deductions: In late 2018 congress passed a law which changed the standard deduction for couples from around $12.5k annually to over $25k. What happened as a result was that millions of families who previously took a deduction for making charitable contributions found that taking a standard deduction was now more attractive. They LOST the deduction for giving to charity. 

 Forced Distributions from your IRA: If you are older than 72 the IRS forces you to take distributions from your IRA’s annually.  These distributions are called Required Minimum Distributions (RMD’s). These forced distributions are considered “ordinary income” for tax purposes and are therefore expensive compared to other sources of income for retirees.  

 Save on Taxes by contributing to charity from your IRA: The IRS allow investors with an IRA who are over 70.5 years old to give directly to a charity from their IRA. This is called a Qualified Charitable Distribution or QCD. These direct contributions are NOT taxable – which means you will save whatever taxes you would have paid if taking the taxable distribution!

 How does this work?  Let me provide you with an example:

 Tom and Melanie are 73 years old, and both have IRA’s. Their annual required distribution from these is $30k, and they generally give around 15k a year to charity.

 No QCD:     

·        Take standard deduction (~27.8k) 

·        30k IRA distribution taxed at 24% = $7,200 in taxes

 QCD:            

·        Take standard deduction (~27.8k)

·        15k IRA distribution taxed at 24% = $3,600 in taxes

·        NO TAX on QCD of 15k to charity

·        Lower AGI may also make them eligible for other benefits and deductions and perhaps lower their tax bracket

 Bottom Line: QCD saves $3,600+ in client taxes annually by doing a QCD!

 The larger the amount a taxpayer gives to charity annually the greater the potential tax savings – in many cases saving taxpayers close to $10,000 annually in taxes.  

 Additional rules to consider:

·        Gift must be made directly to charity

·        Cannot contribute more than 100k per taxpayer annually

·        Can contribute MORE than the RMD and the entire amount is excluded from AGI

·        Cannot contribute QCD’s to Donor Advised funds or private foundations

·        You can start making QCD’s at 70.5 despite not yet starting RMD’s…

 As is always the case when it comes to taxes – the “devil is in the details” so make sure you consult competent tax help before attempting to do a Qualified Charitable Distribution. For many, the tax savings alone will pay for the cost of a financial advisor and/or accountant.