Tax-Free IRA Charitable Deduction | Fee-Only Financial Advisor

By Rosanne Rogé, CSA, RFG, CFP®
Managing Director

For those age 70 ½ who are required to make annual Required Minimum Distributions (RMD’s) from their Individual Retirement Accounts (IRA’s), the U.S. Internal Revenue Service (IRS) has given individuals, who can afford to be philanthropic, a gift in the form of a tax break. The Tax Cuts and Jobs Act of 2017 has finally made the change permanent. 

These charitable contributions are known as Qualified Charitable Deductions (QCD). Those individuals who have attained age 70½ or older and have an IRA can make a direct charitable gift, up to a maximum of $100,000 a year, to a public charity from their IRA accounts. Best of all, these gifts count towards your minimum required distribution (RMD) and are not considered part of your adjusted gross income (AGI).   

The key word here is “direct”. The qualifying donation must come from your IRA account and go directly to the charitable institution without passing through your hands along the way. More importantly, the check that your custodian sends to the charity on your behalf, should include your name and address as the donor, so the beneficiary institution can send you an official letter of acknowledgment. The benefit is that you are now able to act on your charitable impulses using tax-free money.

There are, however, a few things to bear in mind: 

  • If you make the QCD contribution directly from your IRA, you cannot also claim a charitable deduction on your income tax return. That’s because you are not taxed on the distribution.
  • A QCD must come from a traditional IRA where the beneficiary is over 70 ½.  QCDs cannot be made from employer-sponsored retirement accounts, like 401(k)’s, 403(b)’s. To make contributions from these types of accounts, it must be first rolled over into an IRA Rollover account, so they can qualify to become a QCD contribution. 
  • Be sure the charitable organization is “qualified.” The list of “qualified” charities includes all 501(c)(3) organizations. 
  • Donor-advised funds (offered by many community foundations and some financial institutions) and non-operating private foundations do not qualify for gifts under this provision.   
  • You must receive a confirmation letter from the charity.  The letter must include a statement that no goods or services were received in exchange for the gift (this is the same requirement that is normally placed on any charitable deduction).

Who will benefit from this type of philanthropy?

  • Charitably inclined individuals with traditional IRAs.
  • An individual with high medical expenses.  Medical expenses are deductible if they exceed 10% of an individual’s AGI.  A QCD will reduce a client’s AGI which will enable them to deduct more of their medical expenses.
  • If an individual faces significant Social Security taxes, a QCD may allow them to reduce or eliminate the taxes on their Social Security Benefits.
  • A QCD may also help reduce income which affects Medicare premiums due to the higher AGI generated by a required minimum distribution.
  • If an individual is unable to deduct all their charitable contributions, due to AGI limitations, a QCD is a way for them to reduce their AGI and get the charitable benefit.
  • A QCD is a tax saving tool that effectively allows for the shifting of charitable deductions from IRS Tax Form 1040, Schedule A, where they may not be entirely useful, to the front page of Form 1040 where they are useful to anyone who pays taxes.

It’s important to check with your accountant first to see just how much you need to donate and the tax savings it will produce for you.  Also, speak with your IRA custodian to see what procedures they have in place to make the Qualified Charitable Deduction (QCD).

There is no downside to making this type of contribution.  It will reduce the income reported on your tax return and therefore, save on taxes.  As a matter of fact, it’s a win-win strategy.  You will be doing good for your favorite charity and reduce your tax bill at the same time.

© Copyright 2018, R. W. Rogé & Company, Inc.  All rights reserved.

Rosanne Rogé, CFP®, CSA, RFGsm is Managing Director of R. W. Rogé & Company, Inc.  603 Johnson Avenue, Suite 103, Bohemia, NY 11716.  Phone: (631) 218-0077; Website: www.rwroge.com

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