by Jonathan Goudy / News, Tax Planning
If you have an interest in supporting your favorite charity, today we consider a charitable, yet tax efficient, use of your IRA assets.
- Whether cash flow is needed or not, every IRA owner 70 ½ and older must take required minimum distributions (“RMDs”) from their IRAs each year, based on your life expectancy and the January 1 value of all of your IRAs. This is not due to the IRS’s concern for our having adequate retirement cash flows to ensure a satisfying lifestyle, but rather a desire to collect current ordinary income tax from IRA distributions, rather than allowing the tax deferral to continue indefinitely.
- If you are fortunate enough not to need all of your RMDs to maintain your lifestyle, you have the opportunity to make a direct “Qualified Charitable Distribution (“QCD”)” from your IRA to any public charity of up to $100,000 each year, without including such transfer in your adjusted gross income (“AGI”).
- QCDs may only be made unconditionally to public charities, and not “quid pro quo” donations (i.e., for better basketball tickets). The charity must be public, not a private foundation, donor-advised fund or supporting organization.
- QCDs may be made from IRAs or Roth IRAs, but not from SEP, SIMPLE or inherited IRAs. As distributions from Roth IRAs are income tax-free, they are likely not the best alternative.
A QCD will satisfy the donor’s RMD, without increasing AGI, so less income tax will be due and good will be done.
Having a higher AGI due to an IRA distribution can be detrimental to you for reasons unrelated to your IRA. Many expensive results derive from higher AGIs:
- Higher income taxes on social security.
- Limitations on itemized deductions and personal exemptions due to “haircuts” of such items for those with higher AGIs.
- Limitations on annual charitable deductions (e.g., limited to 50% of AGI) could restrict deductions for your current-year contributions (although currently non-deductible contributions can be carried forward and deducted for a period of up to five years).
- Medicare insurance premiums and Medicare surcharges increase.
Because QCDs do not increase AGI, they do not exacerbate these adverse results.
The QCD is not taxable income, so it is not deductible.
- QCDs allow the approximately two-thirds of taxpayers who take the standard deduction, without deducting charitable gifts, to now get the equivalent of a deduction.
- Not being taxed on income is the equivalent of a tax deduction.
Making a QCD is painless:
- Simply contact the charity to determine the proper payee name for the check.
- Then instruct your IRA custodian or trustee to make a transfer from the IRA directly to the charity. Most custodians already have forms and procedures in place to make this transfer.
- The check cannot be made payable to you, it must be to the charity. It cannot flow through a non-IRA account of yours as an intermediate step.
- The check must go directly to the charity, which must then issue you a letter of acknowledgement.
Your assets flow in one of three directions during life and at death:
- Your family, friends and designees, or
- Charities of your choice, or
- The Government.
Why not choose who gets your assets, rather than defaulting them to the Government?
The QCD is a user-friendly and effective way to further the good works of your favorite charities. You really can do good while doing well on your tax planning!
Remember, it’s not what you make that matters…it’s what you keep!
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.