The IRS is
giving charitable donors a significant benefit in not paying taxes on
distributions from IRAs. Making a
charitable contribution to a charity directly from an IRA can benefit donors
who are at 70-1/2 years or older.
An advantageous charitable opportunity is available for potential donors who are 70-½ years or older and have an Individual Retirement Account (IRA), or those who may be rolling over their current plan such as a 401K or similar plan to an IRA.
While many individuals feel that writing a check or giving appreciated assets to a charity is beneficial, there is now a permanent estate planning technique that allows a donor to make a contribution from an IRA directly to the charity.
As a Qualified Charitable Distribution (QCD), the donor will be taking funds from his or her IRA and having the contribution made by the custodian directly to the charity. In doing so, the QCD does not get listed on the income tax return of the donor as taxable income. Similarly, there is no contribution taken on the income tax return since the income was never listed as taxable. This basically is a wash, but there are other significant benefits available as a result of reducing taxable income:
1. Adjusted Gross Income: The first benefit is that many people will not be making charitable contributions that are deductible since they may no longer be itemizing their taxes. The tax laws have been changed limiting the amount that may be taken as a deduction for state and local taxes, eliminating investment and tax-related expenses, and in the future, limiting other deductions that were once allowable. As a result, many people will not be able to itemize their returns and thus will take the standard deduction.
If a person does not list the income from the IRA as taxable, even if they do not have the ability to write the deduction off as a charitable deduction, there are significant benefits. The first is that the income will not be taxable and thus reduce the taxable income that is listed on their return. Thus, they will not be in a higher bracket as they will have less adjusted gross income.
2. Social Security Benefits: The second benefit will be that the amount of Social Security that may be required to be taxable will be reduced since there will be less adjusted gross income to count as taxable income for counting Social Security benefits as taxable.
3. Medicare Part D Premium: Third, the amount that a person must pay for their Medicare Part D premium is based on their adjusted gross income. By making the IRA taxable, this will reduce their income thus, hopefully reducing their premiums that are due for Medicare.
The distribution from the IRA to the charity also satisfies the required minimum distribution. This amount is, however, limited to $100,000 per year per donor. For example, if a person had a required minimum distribution of $20,000 per year, the $20,000 QCD could be paid directly from the custodian of the IRA to the selected charity, and the $20,000 would not be listed as taxable income. Of course, there would not be a corresponding charitable deduction, but the mere fact that the amount is not listed as income should be beneficial to the donor.
The time to make charitable distributions from the IRA is early in the year. If a person withdraws all of his or her required minimum distributions during the year, it will be too late at the end of the year to classify those distributions as non-taxable. Therefore, any person who has an interest in making a charitable contribution should consider speaking with his or her tax advisor to determine whether the payments they are taking on a monthly basis or yearly basis should be taken from the IRA and paid directly to their desired charities. Of course, this does not need to be the sole contribution on an annual basis as there may be other options available to a donor, but it is important to at least consider this option as the IRS is giving donors a significant benefit in not paying taxes on distributions from IRAs.
About the Author
This from an article by Hyman G. Darling, Certified Elder Law Attorney, NAELA past president and Fellow of the Academy, appeared in the NAELA News, a publication of the National Academy of Elder Law Attorneys.