In 2015, a tax break valued by many charitably inclined retirees was made permanent: the qualified charitable distribution. If you are age 70½ or older, you can make direct contributions of up to $100,000 annually from your IRA to qualified charitable organizations without owing any income tax on the distributions.
Use a qualified charitable distribution to satisfy your RMD
A qualified charitable distribution can be used to satisfy your required minimum distributions (RMD). You must begin to take annual RMDs from your traditional IRAs in the year in which you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.
So if you don’t need the RMD for your living expenses, a qualified charitable distribution can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid out to you.
Avoid negative tax consequences of receiving your RMD personally
You might be able to achieve a similar tax result from taking the RMD payout and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation. This has two possible downsides:
- The reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.
- If your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 50% of your adjusted gross income for the year. (Lower limits apply to donations of long-term appreciated securities or made to private foundations.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.
A qualified charitable distribution avoids these potential negative tax consequences.
Have questions about qualified charitable distribution or other giving strategies? Please contact us. We can help you create a giving plan that will meet your charitable goals and maximize your tax savings.