I’m going to make a bold statement: Almost everyone over age 70 ½ who gives to charity and has an IRA should take advantage of this tax saving provision.
The IRA Qualified Charitable Distribution (QCD) allows individuals age 70½ or older to make tax-free gifts from their IRA to one or more qualifying charities. When you do a QCD, you direct monies to be paid directly to a charity instead of yourself.
Why?
- The distribution counts towards your required minimum distribution (RMD). Therefore, directing funds to a charity does not increase the amount you need to take out. Note, RMDs are not required this year due to the CARES Act, and in the future, the IRS will not require RMDs before age 72. Nonetheless, anyone age 70 ½ can still do a QCD.
- The distribution does not count as taxable income to you or the charity. By reducing your taxable income, you will lower your income taxes and may decrease the percentage of taxable Social Security income, giving yourself a DOUBLE tax benefit.
- By lowering your taxable income, you may also lower your Medicare Part B premiums.
- Your contribution is not limited to itemized deduction restrictions. Less than 14% of taxpayers can now itemize due to high standard deductions, which means that most taxpayers get little or no tax benefit from their contributions. Under the CARES Act, individuals, whether they itemize or not, can deduct up to $300 in charitable gifts ($600 for married filing jointly). However, if they cannot itemize, they receive no additional tax deduction for larger contributions. Because the distribution to charity (QCD) is not taxable to you, it is as if it were deductible at any level – bypassing all itemized deduction restrictions!
- It is excellent for large donations. You can give up to $100,000 from your IRA to charities. Due to all the tax benefits mentioned above, a $100,000 gift from an IRA could save $10,000 more in taxes than if given from non-IRA funds.
- It is excellent for small contributions. The emphasis is frequently on $100,000, so smaller donors may not even think about this option. You can use a QCD for any amount. A $1,000 gift, even at moderate income levels, could easily save $200 or more in taxes.
Older IRA owners should consider the potential tax benefits of this charitable giving strategy. But time is of the essence – to take advantage of this benefit in the current year, you must transfer your IRA Qualified Charitable Distribution by December 31. For more information contact McDaniel – Knutson Financial Partners.