End of the Year Tax Planning: Charitable Gifting From Your IRA

Each year, individuals over 70.5 have to satisfy year end required minimum distributions (RMDs) from the IRA accounts. A great strategy to help reduce taxes, if the withdraw is not needed for income, is to direct the money from your account to your favorite charity. The process is called, making a qualified charitable distribution (QCD). The rule, which became permanent in 2015, is one of the most powerful tax savings tools for anybody who qualifies.

What is the QCD?

The rule allows a person who is over 70.5 to make a charitable donation directly from his/her IRA. Transferring money directly from your IRA to your favorite charity can be a big benefit as you can exclude the withdrawal distribution from your total income, which is similar to taking a deduction.

Who qualifies?

IRA owners over 70.5 have a required minimum distribution (RMD) that they have to make each year. A smart way to save taxes on the distribution is to directly transfer some or all of your RMD, to a charity, as long as the charity is a 501(c)(3) organization.

As an example, let's say you normally give $5,000 to charity each year. And, just to make the example easy, let's say the required minimum distribution is also $5,000. Instead of the old way of writing a check to the charity from your savings account, you can instead, make a direct transfer from your IRA to this charity.

Should I consider this for tax savings?

Due to the changes in tax brackets and tax deductions this year, many retirees will not benefit from itemizing and will file for the standard deduction. This means that many will not take deductions from making donations to charities on their taxes.

However, QCDs will not be included on your gross income. This is a very important consideration since this is a direct deduction of your income tax liability. Using the example above, if the person uses the QCD for his $5,000 RMD, he/she will not include the RMD as income for tax purposes.

Is there a maximum amount?

The maximum amount you can claim as a deduction for your charitable contribution(s) from the IRA account is $100,000. However, you can use multiple IRAs to satisfy the rule.

Do all charities qualify?

Private foundations, donor advised funds and charities that are not 501(c)(3) organizations do not qualify for QCDs.

For more questions or other investment related savings information, please contact our office at 252-439-1344 or 910-215-0162

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