If you’re 70½ or older and looking to do good, you can donate some or all of your required minimum distribution from an IRA to a charity tax-free.
This wrinkle becomes more important now that the new tax law doubles the standard deduction to $12,000 for individuals and $24,000 for married couples. The higher standard deduction means that more people will take the standard deduction, rather than itemize their deductions. And in that case, their charitable donations won’t reduce their taxes, as they did previously.
First a little explaining about IRAs.
Upon reaching 70 1⁄2, IRA owners must withdraw a minimum amount each year (except for Roth IRAs, which don’t require withdrawals until the owner dies).
However, when you begin taking this required minimum distribution (or RMD), the IRS allows you to give up to $100,000 directly to a charity — without paying a tax on the withdrawal — instead of taking it as a taxable distribution. This is called a qualified charitable distribution (QCD).
“This tool will become more important under the new tax law as fewer individuals itemize their deductions,” says Matthew Rapoport, a senior wealth adviser with The Colony Group in Babylon.
Donors won’t get a tax deduction. But they also won’t be taxed, as they would for other IRA withdrawals. (Roth IRA withdrawals aren’t taxed; the discussion here focuses on regular individual retirement accounts.)
The benefit of making a qualified charitable distribution is not simply that you are not taxed, says Marc Lowlicht, CEO of OPES Private Wealth Management in East Hampton; the donor also keeps “the potential of not moving into the next or higher tax bracket, versus taking the RMD directly and then donating it to the charity.”
Be mindful of the rules regarding QCDs. Rapoport points out three of them.
- Distribution must go directly from the IRA trustee to a charitable organization (the dollars cannot first be made payable to the account owner and then to the charity in a two-step process).
- The distribution must go to a public charity. A public charity has multiple donors and uses the money to fund its goals, which usually benefit the public.
- The distribution must be acknowledged by the charitable organization (and the individual should not receive a benefit that would otherwise reduce a charitable deduction such as, for example, event tickets).
Like all major financial decisions, Lowlicht says, “Check with your tax professional to ensure that this strategy is appropriate for your needs.”