Did you know that if you are age 70 ½ or older, you are able to donate up to $100,000 tax free from your IRA to a qualifying charity each year? A little known provision in the tax law, made permanent in 2015, gives taxpayers a way to do this. Generally, when you take a distribution from your IRA, it is treated as taxable income. Using this provision keeps the distribution from being included in your income, effectively making the donation the equivalent of a 100% deduction!
This provision may be especially attractive for retirees who don’t need all the income from their IRA to meet current living expenses. By donating the money to charity, you can enjoy the satisfaction of knowing that you are contributing to a worthy cause while lowering your tax bill at the same time.
In addition, recent tax law changes nearly double the standard deduction, which will likely result in fewer taxpayers itemizing deductions, and more opting to claim the standard deduction. The provision offers the tax benefits of a charitable contribution without you having to itemize your deductions.
It also helps you if reporting additional income on your 1040 would increase your Medicare Part B premiums, or negatively affects the taxability of your Social Security benefits.
Here is how it works:
- IRA account owner must be age 70 ½ or older at the time of the donation. This is an important point because required minimum distributions (RMDs) may begin in the year you turn 70 ½. Meaning, you could take an RMD before you turn 70 ½, but you cannot take advantage of this provision until you actually reach the date you turn 70 ½.
- Rule applies to Traditional, Rollover, and Roth IRAs.
- SEPs and SIMPLE IRAs are generally excluded.
- Distributions of non-deductible IRA contributions also do not qualify.
- Annual Limit
- Maximum amount of the Qualified Charitable Distribution (QCD) may not exceed $100,000 per tax year.
- This includes RMDs.
- Distribution must be made to a Qualifying Charity! See IRS Publication 78 for more details.
- Private foundations and donor-advised funds are not.
- Direct Contribution
- The IRA trustee or custodian must make the distribution directly to the charity.
- Distributions made payable to the IRA owner and transferred to the charity will not qualify.
- Proper Reporting
- Charitable distributions are reported on Form 1099-R for the calendar year the distribution is made.
- To properly report the distribution on your Form 1040 as non-taxable, you generally report the full amount of the charitable distribution on the line for IRA distributions.
- On the line for taxable amount, enter zero if the full amount was a QCD.
- You then enter “QCD” next to this line.
- See the Form 1040 instructions for additional information.
- You must also file Form 8606 for nondeductible IRAs if:
- You made the QCD from a traditional IRA in which you had basis and received a distribution from the IRA during the same year, other than the QCD; or
- The QCD was made from a Roth IRA.
Donating IRA assets can be a financial “win-win” for both you and the charity. For more information on this strategy, you should talk to your financial or tax advisor before making a decision that alters your tax situation.