While tax laws have changed, one thing hasn’t changed – donors over the age of 70½ can save on taxes by giving gifts through their IRA.
It’s simple: you can make a Qualified Charitable Distribution (QCD) to your favorite charity, and it counts towards your required minimum distribution amount.
Unlike garden-variety charitable donations, you can’t claim itemized deductions for QCDs. But that’s OK. The tax-free treatment of QCDs equates to a 100% deduction — because you’ll never be taxed on those amounts, and you don’t have to worry about any of the tax-law restrictions that apply to itemized charitable write-offs. (Source)
What is an IRA Charitable Distribution? The IRA Charitable Rollover provision allows individuals who have reached age 70½ to donate up to $100,000 a year to charitable organizations directly from their Individual Retirement Account (IRA), without treating the distribution as taxable income.
What does this mean for you? This is a special charitable giving opportunity for individuals like you who saved diligently for retirement and now have the good fortune to be able to give back to the community. It allows American seniors to make the gift of a lifetime—by giving a portion of their individual retirement accounts (IRAs) to a cause they care about, tax-free.
Overview of Tax-Saving Advantages of IRA Qualified Charitable Distributions (Source)
- QCDs aren’t included in your adjusted gross income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based rules — such as those that can cause more of your Social Security benefits to be taxed, fewer of your rental estate losses to be deductible, and more of your investment income to be hit with the 3.8% net investment income tax. QCDs are also exempt from the rule that says your charitable write-offs can’t exceed 60% of your AGI for the years 2018-2025.
- A QCD from a traditional IRA counts as a distribution for purposes of the RMD rules. Therefore, you can arrange to donate all or part of your 2018 RMD (up to the $100,000 limit) that you would otherwise be forced to receive before yearend and pay taxes on.
- QCDs are treated as coming from the taxable layer of your IRA balance. Say, for example, that you own one or more traditional IRAs to which you have made nondeductible contributions over the years. Your IRA balances consist of a taxable layer (from deductible contributions and account earnings) and a nontaxable layer (from those nondeductible contributions). QCDs come from the first, taxable layer. Any nontaxable amounts are left in your IRA(s). Later, those nontaxable amounts can be withdrawn tax-free by you or your heirs.
- QCDs reduce your taxable estate, although that’s much less an issue for most folks right now because the TCJA drastically increased the federal estate tax exemption for tax years 2018 through 2025. The exemption for 2018 is a whopping $11.18 million ($22.36 million if you’re married).
Interested in supporting the Trust through an IRA Charitable Distribution? Contact your financial advisor today or learn more here.