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How to Take Tax-Free Qualified Charitable Distributions from Your IRA

11/24/2020

 
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If you're age 72 or older you probably know you must begin taking distributions from your IRA -- whether you want to or not.  

The IRS life expectancy tables determine your Required Minimum Distribution (RMD) based on the previous years ending balance for your IRA and your attained age for the tax year.

The Qualified Charitable Distribution (QCD) rules provide those subject to RMDs an option that can help them reduce their income tax liability by having certain charitable contributions made directly to a qualified charity. Given the changes to itemized deductions and the standard deduction in the 2017 tax law update, the Qualified Charitable Distribution rules for your IRA account becomes even more important.

If you make charitable contributions throughout the year, it would be wise to consider making those contributions directly from your IRA. Up to $100,000 of charitable distributions from each IRA owner's accounts can be excluded from your taxable income each year.

Say you plan to give $10,000 to your church or another qualified charity and you're receiving taxable distributions from your IRA. If you make the contribution to the charity directly from your IRA, your $10,000 gift will not be reported as income on your income tax return.
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If you instead receive these funds as income from your IRA distribution and then send the same $10,000 to the charity, it is included in your taxable income and could result in higher Medicare premiums and a higher percentage of your Social Security income being taxable. If you don't have itemized deductions that exceed the new $24,000 per couple or $12,000 per individual standard deduction, you could lose all the tax benefits of your generosity.

By having the distributions sent directly to the qualified charity from your IRA, you will exclude the amount from your taxable income, potentially lowering your Medicare premiums, the taxable portion of your social security benefits, and your overall income tax rate at both the federal and state level.
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If you follow this strategy, be sure to let your income tax preparer know. There may be no indicator on the 1099R you receive at the end of the year that shows that part of your distribution is non-taxable, so there is a chance many people using this strategy are over-paying their income taxes each year.

Sharon Wells
8/3/2018 08:21:01 am

This is incredible information. Thank you!!


Comments are closed.

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  • HOME
  • SERVICES
    • Financial Planning
    • Tax Planning
    • Fiduciary Investment Management
    • Small Business Planning >
      • Business Retirement Plan Advisory
  • ABOUT US
    • WHAT IS A FEE ONLY ADVISOR?
    • FREQUENTLY ASKED QUESTIONS
    • OUR TEAM
  • BLOG
    • BLOG
  • SCHEDULE AN INTRO CALL
  • CONTACT A FINANCIAL PLANNER
  • Form ADV Part 2