Reduce your taxes by using an IRA to fund charitable gifts
The 2018 federal tax overhaul changed the ability for millions of Americans to deduct charitable donations from their taxes. However, if you are over 70½ years old and have an individual retirement account (IRA), you can circumvent the new limitations – if you use your IRA to make charitable gifts.
To qualify, the charitable distribution must be:
- Made from a traditional IRA or Roth IRA (Donations from 403(b) plans, 401(k) plans, pension plans and other retirement plans are not eligible.)
- Direct from the IRA trustee to the charity with no intervening possession or ownership by the IRA owner (you)
- Made to a qualified charitable organization, not a private foundation, a supporting organization or a donor advised fund (DAF).
What is the annual limit?
After age 70½, you may contribute up to $100,000 each year from your IRA to a qualified charity. If you are married and your spouse also owns an IRA, each of you can contribute $100,000 from your respective IRAs for a total of $200,000 in charitable donations. The charitable distribution must be completed by December 31 in the year it is claimed.
How would I benefit?
A qualified charitable distribution (QCD) offers several tax benefits:
DECREASED INCOME LEVEL
When you make a charitable gift directly from your IRA to the charity of your choice, the transferred amount is excluded from your income. You cannot claim a tax deduction for the gift, but the donated amount will be excluded from your income and will not be taxed. A QCD can satisfy the annual IRA required minimum distribution.
AN OPTION TO THE STANDARD DEDUCTION
The 2018 tax overhaul doubled the standard tax deduction, which stands at $12,550 and $25,100 for singles and couples, respectively for 2021. It is estimated that 90% of American taxpayers now take the standard deduction because it is higher than their itemized deductions. In turn, they no longer receive tax savings from former write-offs, such as charitable gifts. However, everyone over 70½ who uses a QCD to make charitable gifts essentially receives a tax break for the gifts even if they take the standard deduction when filing taxes because the gifted amount is excluded from their income. Note: Donor may not receive any goods or services in exchange for the donation.
REDUCED TAXES ON SOCIAL SECURITY BENEFITS
A distribution from an IRA may increase the income tax on your Social Security. A gift from your IRA through a QCD can decrease your income, thereby decreasing your taxable Social Security income.
How can I make a charitable gift using IRA funds?
Simply call your IRA trustee. Instruct them to make a distribution directly from your IRA to your charity of choice. The distribution check should include your name as the IRA owner, allowing the charity to track the donation and send you an acknowledgement letter.
Using IRA funds to make a charitable donation is easy and can save a significant amount in taxes. We encourage you to explore financial options with your tax advisor or contact Lon Dufek in the Providence Office of Gift Planning.