You regularly give to your church and when a hurricane or other natural disaster relief is needed, you step up. You have a few local charities you give to every year. And up until a few years ago, you could also deduct most of your charitable giving from your gross income at tax time.
Most retirees we meet with are giving financially to a charity, non-profit, or religious organization annually out of their bank account. They want to give, of course, but they have also come to expect a benefit when it comes to taxes.
But the new tax code has put the kibosh on receiving a tax benefit for that kind of giving. Under the new tax code, most Americans are no longer able to deduct charitable gifts, or it doesn’t make sense given the larger standard deductions available through the new tax code. Unless you are wealthy and give a big portion of your yearly earnings, itemizing deductions on a Schedule A isn’t necessary. For retirees, this is a double whammy. They don’t get a tax benefit from out-of-pocket charitable giving, plus they are taxed on distributions from their traditional IRA accounts. Dang!
But we can let you in on a little secret. If you give directly from your IRA to a charity, non-profit, or religious organization, you will not pay tax on that money AND it can go toward satisfying your required minimum distributions. That’s a pretty nice way to manage your giving in your retirement years.
Talking to your financial advisor and tax preparer is important in understanding how to give in the most efficient way possible over time. Large or small, there are always changes to the tax code. Working with people who understand this can help you make the most of your resources. You want to make sure you are structuring your gifting in the most tax-efficient way possible.
For now, we want to dig into what the current tax laws say about giving via your IRA. For instance, if your annual income affects your Medicare premiums, charitable giving through an IRA might also be a way to manage those premium costs. Good to know, right?
QCD and RMDs
So how do you know what is qualified to be taken out of your required minimum deductions (RMD) for charitable giving? Let’s take a closer look at what a Qualified Charitable Donation (QCD) is and how it works.
A QCD must meet the normal tax-law requirements for a 100% deductible charitable donation. So let’s say you support a cause but get free tickets to an event in return. That distribution cannot be a QCD. This holds true for traditional IRAs, but not Roth IRAs. Your Roth can be earning tax-free income while it is sitting in the account, so charitable giving, even a QCD, does not provide you with any additional tax advantage.
And just to put a fine point on the RMD part of this equation, according to the IRS, “your qualified charitable distributions can satisfy all or part of the amount of your required minimum distribution from your IRA. For example, if your 2018 required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution for 2018, you would have had to withdraw another $5,000 to satisfy your 2018 required minimum distribution.”
The amount of your giving probably doesn’t change based on what the government is doing with your taxes. But it’s helpful to know that when it comes to retirement, there is a way to give that provides some tax advantage you’ve grown accustomed to over the years.
Charitable giving from your IRA distributions is a great way to keep doing well while you are doing good.