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Being Generous With Your Retirement

Americans are generous.  In fact, $471 billion was donated to charities in 2020 according to Giving USA – a 5.1% increase over the prior year.  The fact that we were in the middle of a pandemic with the related loss of jobs, and that over 80% of all donations came from individuals,  makes this number even more impressive.

To add to the feel good moment, there are many reasons why a person donates, and tax benefits are way down the list.  The 2018 increase in the standard deduction removes the charitable contribution from the realm of tax benefit for many people, and those who do reap benefits still prioritize the personal and emotional benefits they receive from donating to charity.  Double feel good.

All that said, there is one often overlooked way to reduce your taxes when making a contribution.  It applies to those who are required to take distributions from their retirement plan ( RMDs).

For those age 72 and older, you are allowed qualified charitable distributions from your IRA.  If you have an annual giving commitment to your favorite charity or church, or have a one time giving opportunity that you would like to fund, using your IRA is oftentimes an effective tax planning tool.

Let’s start with the requirements.  The IRS in Publication 590-B defines a qualified charitable distribution ( QCD) as

“a nontaxable distribution made directly by the trustee of your IRA ( other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions.”   

As a source of funds for a donation, it is good to know that you can tap your IRA.  Importantly, you can direct all or part of your Required Minimum Distribution (RMD) for this purpose, reducing or eliminating the ordinary income created by an RMD in the year of donation.  For those who have limitations to their itemized deductions, this may be a more tax efficient way to donate to charity.

A couple of basic requirements for these rules:

  • You must have an RMD ( which means you are at least 72) if you want to reduce your RMD income.
  • You need the same type of written acknowledgement of your contribution from the charity as you would otherwise need for contributions over $250.
  • The maximum QCD is 100,000 per person annually.
  • You cannot use a QCD to reduce or eliminate your RMD and also claim a charitable contribution deduction for the donation. You can either eliminate the taxable income or claim the charitable deduction.
  • The donation must go directly from the trustee of your IRA to the charity.

So don’t forget to consider this provision if you are eligible.  Waiting until you have already made your annual RMD is too late, so think ahead.  This tax season is a good time to visit with your tax advisor about your eligibility and the impact on your personal taxes.

Reduction of your taxes may not be your primary motivation, but perhaps it will allow you to donate more than you would otherwise.  Being both smart and generous is a powerful combination.

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