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January 23, 2020

IRAs and Charitable Giving – Why You Shouldn’t Wait!

by Tara Cordato

People often think about charitable giving towards the end of the year, but it might actually be better to start your planning now! The way in which you choose to give can have a big impact on the charity and your taxes. If you are currently taking or will be required to take IRA distributions, read on.

Is writing checks the best way to give?

Most donors write checks, give cash or use credit cards to make contributions. But, new tax laws mean many people no longer itemize their deductions – and, thus, do not receive a tax benefit for donations! Although helping out a worthy organization is always a priority, your dollars can go farther if Uncle Sam helps you out. Even if you don’t itemize, using your IRA for charitable giving can lower your tax bill.

What is a Qualified Charitable Distribution?

If you are at least 70-1/2 (or 72 starting in 2020) and are required to take distributions from your IRA, you are allowed to send a portion or all of your RMD (up to $100,000) directly to charity – and exclude this from your income! This is called a qualified charitable distribution (QCD). So, even if you take the standard deduction on your tax return, you can still give to charity and receive a tax benefit (by excluding RMD income).

How does this work? Since the money in your IRA was never taxed, you will be sending tax-free money to charity and not increasing your taxable income. The money sent to charity is not included in your adjusted gross income, so any potential deductions limited by adjusted gross income will not be reduced. Additionally, income items such as capital gains or social security that are taxed at different rates are not impacted. Finally, your RMDs could potentially push you into a higher bracket for Medicare premiums. By excluding this income through a QCD, it might be possible to keep Medicare premiums at lower rates. This is a good deal all around!

Why start thinking about it in January?

There is no right or wrong way to take your RMD. Some people like to take their distributions evenly throughout the year, while others like to wait until December to take the full distribution. If you are one of those people who takes them evenly throughout the year, waiting until December to think about a QCD could ultimately hurt your tax planning – since your remaining RMD might be less than you want to donate.

If you’d like to give donations throughout the year as well, be sure to remember that you may send contributions from your IRA at any point in the year. If you meet the requirements to do so, it almost always makes more sense to send contributions directly from your IRA than by writing a check. You are also allowed to send more than your RMD provided the amount does not exceed $100,000 annually.

Now is the time!

A little planning can go a long way when it comes to charitable giving. At Rowling & Associates, we are always happy to help you meet your charitable goals in the most tax-efficient way possible. We encourage you to take advantage of all the tax savings you can by planning ahead and knowing your options.

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