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Qualified Charitable Distribution from Your IRA May Save You Taxes, Reduce Your Medicare Payment and Leave a Legacy to Your Favorite Charity
By Theresa M. Varnet on January 24, 2022A little-known tax-free distribution from a traditional IRA allows persons 70 ½ and older to give up to $100,000 from their Individual Retirement Account (IRA) to charity each year. The distribution counts toward your required minimum distribution (RMD) for the year and is excluded from your adjusted gross income. By reducing your adjusted gross income, donating to a 501(c)(3) charity allows you to reduce your taxable income and may reduce the amount you pay for Medicare and taxes on your Social Security.
Charitable distributions from an IRA are a win-win opportunity. The taxpayer wins by reducing his or her taxable income and the charity wins in that it gets the full value of an IRA donation. If you withdraw the same amount of money from your IRA, you must pay income taxes on the amount withdrawn. If you donate directly to a charity, the charity receives the gift 100% tax free! Even if you take the standard deduction, this method of donating allows you to get a tax reduction because the withdrawal from the IRA is not counted in your income, thus you save income taxes. Please note that for this reason charitable distributions from an IRA are not eligible for a charitable tax deduction since they are not included in your adjusted gross income and are exempt from income tax.
The tax-free transfer lets you benefit from making a gift to your favorite charity, even without itemizing. It is important to have the gift made directly from your IRA. While the gift can be made up to December 31 of each year, it is important to not wait until the last minute to make such a gift. Your IRA manager must make the transfer and the charity must cash the check prior to the end of the year. It is best to begin processing the gift no later than November 1 in order to ensure the paperwork clears before the end of the year.
You should also note that the check cut from your IRA must be made payable directly to the charity by the custodian of your IRA (do not make it payable to you). Call the financial institution that holds your IRA and ask about its charitable rollover procedures. If you hire an accountant to complete your tax returns, be sure to advise the accountant that you have made a qualified charitable distribution (QCD) during the year. The IRA custodian will issue a 1099 for the full amount of any distributions and your accountant must indicate on your tax return that you gave a QCD and then subtract the amount of the QCD from the reported amount of IRA distributions. It is also recommended that you contact the charity to let it know a gift has been made directly to the charity from your IRA so the charity is “on notice” to look for the gift; IRA custodians do not always include the name of the person making the gift when they cut the check directly to the charity. If you want confirmation of your gift from the charity, you should let the charity’s management know to expect a check from your IRA custodian. Please consult your tax advisor or your attorney at Fletcher Tilton to confirm how you could benefit from this opportunity.
©2021. This material is intended to offer general information to clients and potential clients of the firm, which information is current to the best of our knowledge on the date indicated below. The information is general and should not be treated as specific legal advice applicable to a particular situation. Fletcher Tilton PC assumes no responsibility for any individual’s reliance on the information disseminated unless, of course, that reliance is as a result of the firm’s specific recommendation made to a client as part of our representation of the client. Please note that changes in the law occur and that information contained herein may need to be reverified from time to time to ensure it is still current. This information was last updated November 2021.
Charitable distributions from an IRA are a win-win opportunity. The taxpayer wins by reducing his or her taxable income and the charity wins in that it gets the full value of an IRA donation. If you withdraw the same amount of money from your IRA, you must pay income taxes on the amount withdrawn. If you donate directly to a charity, the charity receives the gift 100% tax free! Even if you take the standard deduction, this method of donating allows you to get a tax reduction because the withdrawal from the IRA is not counted in your income, thus you save income taxes. Please note that for this reason charitable distributions from an IRA are not eligible for a charitable tax deduction since they are not included in your adjusted gross income and are exempt from income tax.
The tax-free transfer lets you benefit from making a gift to your favorite charity, even without itemizing. It is important to have the gift made directly from your IRA. While the gift can be made up to December 31 of each year, it is important to not wait until the last minute to make such a gift. Your IRA manager must make the transfer and the charity must cash the check prior to the end of the year. It is best to begin processing the gift no later than November 1 in order to ensure the paperwork clears before the end of the year.
You should also note that the check cut from your IRA must be made payable directly to the charity by the custodian of your IRA (do not make it payable to you). Call the financial institution that holds your IRA and ask about its charitable rollover procedures. If you hire an accountant to complete your tax returns, be sure to advise the accountant that you have made a qualified charitable distribution (QCD) during the year. The IRA custodian will issue a 1099 for the full amount of any distributions and your accountant must indicate on your tax return that you gave a QCD and then subtract the amount of the QCD from the reported amount of IRA distributions. It is also recommended that you contact the charity to let it know a gift has been made directly to the charity from your IRA so the charity is “on notice” to look for the gift; IRA custodians do not always include the name of the person making the gift when they cut the check directly to the charity. If you want confirmation of your gift from the charity, you should let the charity’s management know to expect a check from your IRA custodian. Please consult your tax advisor or your attorney at Fletcher Tilton to confirm how you could benefit from this opportunity.
©2021. This material is intended to offer general information to clients and potential clients of the firm, which information is current to the best of our knowledge on the date indicated below. The information is general and should not be treated as specific legal advice applicable to a particular situation. Fletcher Tilton PC assumes no responsibility for any individual’s reliance on the information disseminated unless, of course, that reliance is as a result of the firm’s specific recommendation made to a client as part of our representation of the client. Please note that changes in the law occur and that information contained herein may need to be reverified from time to time to ensure it is still current. This information was last updated November 2021.
