Share

Updated October 2018, reflecting changes implemented in the Tax Cuts and Jobs Act

 

Giving is its own reward. An old saying, but I’ve always believed it to be true.

Then there are those times, like now, when charitable giving provides an additional reward to the charity-minded giver.

Federal tax rules allow anyone age 70 1/2 or older to make qualified charitable distributions directly to charity each year from traditional and Roth IRAs, inherited IRAs, rollover IRAs and demed IRAs — reaping significant financial and tax benefits as a result. But you have to follow the rules to qualify.

The Tax Rules for Qualified Charitable Distributions

The federal tax rules governing direct IRA distributions to charity include a number of important restrictions, the most significant of which follow.

  The distribution must be made directly from your IRA to the charity. If the distribution is made to you, as the IRA account owner, and you then contribute the money to charity it does not qualify. There is no way to correct a distribution not made directly to charity, even if it resulted from a mistake made by the IRA’s trustee or custodian.

  You can donate up to $100,000 in cash and/or property directly from your IRA account each tax year. For married couples, the $100,000 limit applies separately to each person with an IRA.

There is no carryover. That means you can’t individually donate $200,000 in one tax year and carry over the excess donation to the next tax year.

  Distributions from SEP IRAs and SIMPLE plans generally do not qualify.

  Not all charities are qualified recipients. Typically, qualified charities are those referred to as 50% charities. Private foundations, supporting organizations and donor-advised funds are not qualified recipients.

  You cannot receive anything back from the charity in return for your contribution.

  You must get a written acknowledgement of your donation from the charity. The acknowledgement must include the date and amount of the charitable contribution, the name of the IRA custodian, and a statement that no goods or services were received by you in exchange.

SEE ALSO Donating to Charity? Know the Rules for Substantiating and Deducting Charitable Contributions

Financial and Tax Benefits

An IRA distribution contributed directly to charity is considered part of your minimum required IRA distribution (RMD) for the year.

This type of IRA distribution also provides a number of financial and tax benefits, including the following.

The distribution itself is free from federal income tax. You won’t be required to report any of the distribution amount as income on your tax return and the distribution won’t increase your adjusted gross income. That means you won’t affect other tax benefits that are limited based on adjusted gross income.

An IRA distribution that is included in income has the potential to increase taxes on Social Security benefits and can increase Medicare premiums. An IRA distribution made directly to a qualified charity does not.

In fact, there are any number of things that are calculated based on adjusted gross income, so excluding the amount of IRA distribution can have a significant positive effect. They include the net investment income tax of 3.8 percent, limits on charitable deductions and certain medical expenses—even contributions to Roth IRAs.

Finally, the qualified charitable distribution is not reported as a charitable deduction on your tax return. While that might initially sound like a downside, it actually isn’t. It can provide a significant benefit. That’s because the tax-free income treatment provides essentially the same tax benefit as a 100 percent write-off — without requiring that you itemize deductions.

By contrast, the tax deduction for cash donations requires that you itemize and is limited to 50 or 60 percent of your adjusted gross income, depending on the charity and any property donations you make.

SEE ALSO Donating to Charity? Know the Rules for Substantiating and Deducting Charitable Contributions

 

Want to know all the benefits of making
a Qualified Charitable Distribution?

Let us hear from you. We can help.

SUSAN B. QUEARY
Bader Martin EmailBader Martin PhoneLinkedInBader Martin Profile