A survey by the Investment Company Institute found that 33 percent of American adults were IRA owners in 2017. In that same year Americans donated $410 billion to nonprofits, according to the Giving USA Report, for a $20 billion increase from the prior year. Interestingly fewer middle class families gave than in prior years, but those that did gave more. Apparently those IRA owners comfortable in their retirement savings journey are giving more than ever.

The benefit of deducting charitable contributions as an itemized deduction is fading because many taxpayers are using the standard deduction. Are you an IRA owner age 70½ or older? If so, you should learn about Qualified Charitable Distributions (QCDs). QCDs offer an alternate tax-reducing strategy for folks over 70½ who are using the standard deduction ($27,000 if married and $13,850 if single for 2019).

The IRS requires that IRA owners over 70½ take a certain amount of money out each year. This is the “Required Minimum Distribution,” often shortened to “RMD.” This amount is determined by an IRS table that assigns each taxpayer a factor depending on age, and then applies that factor to his account balance. Whatever amount this renders, he must take out before the end of the year.

For those in need of these funds to support their lifestyle expenses, RMDs are welcomed. For those who do not need the full amount, RMDs can become a tax burden. Recall that pre-tax savings are taxed upon withdrawal, whether you need that withdrawal or not.

QCDs allow qualifying taxpayers to give part or all of their RMDs, up to $100,000 per taxpayer per year, directly to charity. By giving from an IRA directly to a nonprofit, the owner benefits a charity of her choice and avoids the tax that would otherwise be due on the distribution. Note that your QCD can be $100,000 even if your RMD is less than $100,000. Schwab and some other IRA custodians will issue a checkbook on your IRA account so that you can write checks directly to a charity out of your IRA.

Like any other IRS deduction, there are requirements and restrictions involved. The distribution must be from a Traditional IRA, Rollover IRA, or Inherited IRA. If it is intended to satisfy an RMD, the QCD must be paid first, since the first dollars out of an IRA each year are considered RMD dollars. The IRS requires you to collect the usual documentation of the gift. On the receiving end, the donee must be a public charity under IRC Section 170(b)(1)(A). This includes most well-known public nonprofits as well as churches.

If you are of RMD age and are charitably inclined, consider taking a QCD and reaping a tax benefit to go alongside your generosity. As always, consult your tax adviser or financial planner before carrying out the transaction.

Post Author: Tom Coulter

President of Meridian Trust & Investment Company

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