Wise charitable giving has an element of self interest, and that’s more than OK. After all, isn’t that what you as a donor would like to see happen? Maximum benefits to your favorite causes and maximum benefit for yourself and your own family members – a true win-win.
Fortunately, our tax laws serve as good matchmakers, helping magic happen when your favorite charities and your IRAs “meet”.
- Even though the SECURE Act changed the age at which Required Minimum Distributions out of IRAs begin (rather than age 70 ½, now RMD’s don’t begin until you’re 72), you are allowed to make direct donations to qualified charities out of your IRA beginning the day you turn 70 ½.
- Those who meet the age requirement can transfer up to $100,000 per year directly to an eligible charity without paying income tax on the transaction. If the participant files a joint tax return, the participant’s spouse can also make a charitable contribution of up to $100,000, meaning couples can exclude up to $200,000 of their retirement savings from income tax if they donate it to charity. If a participant donates more than the maximum allowable amount it is considered income and could be subject to income tax. Qualified charitable contributions must be made by December 31 each year in order to exclude that amount from taxable income.
- Charitable contributions can only be made from IRAs, not 401(k)s or similar types of retirement accounts. A participant might need to roll funds over from a 401(k) to an IRA to make tax-free charitable contributions from a retirement plan. The participant does not need to itemize taxes in order to make an IRA charitable distribution. However, the participant cannot additionally claim a charitable contribution tax deduction on a charitable distribution from the IRA. Because the participant is not getting taxed on the distribution from the IRA, the participant doesn’t get to count the transfer to the charity as a charitable deduction as well. The participant should still request an acknowledgment of the donation from the charity for tax purposes to prove the RMD should not be included in the participant’s gross income.
- A $100,000 charitable contribution from an IRA could save the participant tens of thousands of dollars in taxes, depending on the participant’s tax rate. For a retiree in the 25 percent tax bracket, an IRA charitable contribution of $5,000 could reduce the retiree’s income tax bill by $1,250. Even a $1,000 donation would save the retiree $250 in taxes. The benefits of making a charitable contribution from the participant’s IRA are even bigger for those in higher tax brackets. Because the participant is not receiving the distribution, he or she is not taxed on the distribution; it goes straight to the charity.
- Funds must be transferred directly from the IRA to an eligible charity by the IRA trustee in order to qualify for the tax break. If the participant withdraws the money from his or her IRA and later donates it, it won’t qualify as a tax-free qualified charitable distribution. The charity must also be a 501(c)(3) organization in order to receive the tax-free IRA charitable contributions. Charities that do not qualify include private foundations and donor-advised funds. A participant can also distribute his or her required minimum distribution to multiple charities in the same year.
The IRS is helpful – and surprisingly flexible – when it comes to charitable giving out of IRA accounts:
1. They offer a searchable database of approved charities on their website: https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.
2. They allow either of two procedures IRA custodians are allowed to follow: The custodian may transfer money directly to the eligible charity OR provide the IRA account holder with a check payable to the charity, letting the taxpayer deliver the check him/herself.
Charities are also good beneficiaries of tax-deferred retirement plans like IRAs.Assuming your assets include IRAs, investments and real estate held outside the IRA.It can make sense to name a charity as beneficiary of the IRA accounts, with the “nonqualified” assets going to your heirs. Were your children to inherit the IRAs, they’d have to pay tax at ordinary income rates. By making charities the beneficiaries of your IRA accounts, the charities pay no income tax, leaving the children assets which are not subject to tax unless there is a gain on the sale of investments or real estate between your date of death and the time the asset is sold.
While at Geyer Law, our attorneys offer no direct tax advice, instead working in cooperation with tax advisors to coordinate estate planning strategy and tax strategy, we try to bring certain planning opportunities to our clients’ attention.
Would it be helpful for your favorite charity and IRA account to “meet”?
– by Cara Chittenden, Associate Attorney at Rebecca W. Geyer & Associates