Sending IRA Required Minimum Distributions directly to a qualified charity may offer tax breaks under the new tax laws.
Are you or someone you know taking a required minimum distribution from their IRA and then making a qualified charitable contribution? If so, you may be missing out on a tax break!
Before the new tax laws, tax payers would often itemize their deductions to see if their total deductions exceeded their standard deduction. Standard deductions used to be $6,350 for individuals and $12,700 for married couples.However, under the new tax laws that started in 2018, those limits have increased. The new standard deduction is $12,000 for individuals and $24,000 for married couples filing jointly. Thus, fewer and fewer people find a benefit to itemizing their deductions.
As you may be aware, once someone turns 70 ½, they need to begin taking a required minimum distribution (RMD) from their IRAs. This is an annual distribution that is determined by using preset IRS tables.The amount withdrawn is taxable as ordinary income in the year that it’s distributed. If an individual takes their RMD, has it paid to them, and then makes a qualified charitable contribution, they are taxed on the distribution but they probably won’t get any tax deduction for the contribution (unless their itemized deductions exceed the new standard deduction limits, which few individual’s do). So is there anything that can be done to continue to get some tax benefit for making a qualified charitable contribution? Yes, but only if done correctly.
You can still get a tax break for making those charitable deductions by having your RMD go directly from the IRA Trustee or Custodian to the qualified charity. You still get your standard deduction, however, the amount that you send directly from your IRA to the charity is not seen as taxable income to you!
A few important notes to consider.First, only RMDs from IRAs qualify.RMDs from 401(k)s, 403(b)s and other retirement plans can’t be used for this strategy. Secondly, you need to be at least 70 ½ in order to take an RMD, so trying to make a contribution directly to a charity if you are under 70 ½ won’t work. Next, the charity receiving the donation has to be a qualified charitable 501(c)(3) organization. Lastly, some people need their RMD income to meet their needs. Sending your RMD to a charity only to then take out another distribution to cover your living expenses might not have the tax benefit that you were hoping for. It’s always prudent to consult both with your financial advisor as well as your tax advisor or accountant when taking distributions like this.
Reed Financial Planning Services, LLC is here to help you and your family with your planning needs. Reach out to us today if we can be of any assistance to you.
Neither Voya Financial Advisors nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.