Reduce Your Taxable Income by Donating From Your Retirement Account
With only a couple of months left in the year, many retirees who are older than 70 and ½ years of age are required by the Internal Revenue Code to take distributions from their Individual Retirement Accounts, often referred to as Required Minimum Distributions. Each year, these same individuals are also heavily relied on to assist with funding efforts by non-profit entities within our communities.
Prior to 2006, these individuals were required to receive income from their retirement accounts; they, in turn, donated the money to a charity and took a deduction on Schedule A as an itemized deduction. In 2006, Congress passed the Pension Protection Act which allowed retirees to send their Required Minimum Distribution directly to charitable organizations. As with many congressional decisions, this legislative grace was not permanent. After a number of congressional extensions, The Consolidated Appropriations Act of 2016 made Qualified Charitable Distributions (QCD) a permanent option for retirees.
You may be asking, “What’s the big deal? Why should I consider giving funds through a QCD versus just writing a check?” One of the largest benefits individuals see when giving to a charity through the QCD process is the fact that the amount of distribution is not included in their adjusted gross income. By not including the distribution in income, phase out limitations on personal exemptions, standard or itemized deductions and credits may be avoided. Donations would not be subject to “Schedule A” income limitations, and the alternative minimum tax, as well as net investment income tax may be reduced.
With every benefit, you must be aware of the rules such as:
- The age requirement at the time of distribution is 70 and ½, and the charity must qualify for tax deductible contributions.
- The charity must provide the donor with written acknowledgement of the donation.
- The funds must come from an IRA, SEP, SIMPLE or Inherited IRA; as a reminder, QCD’s are capped at $100,000 per year.
When it comes to gifting funds to charities, our staff at Martin Starnes & Associates, CPA’s, P.A. can help you navigate the complications of the ever changing tax laws. Please feel free to contact us with additional questions.
For more information on this topic, please visit these sites: https://www.congress.gov/bill/114th-congress/house-bill/2029; https://www.irs.gov/uac/special-charitable-contributions-for-certain-ira-owners; https://www.kitces.com/blog/qualified-charitable-distribution-qcd-from-ira-to-satisfy-rmd-rules-and-requirements.
Article by: John B. Whitley, Tax Senior Accountant