In fact, you’re even less likely to benefit from your charitable giving if you aren’t making mortgage payments or have a lower annual income—in other words, if you’re retired. This is unfortunate news if you’re charitably minded and had planned to increase your giving during retirement.
Thankfully, there’s another way to engage in charitable giving that doesn’t exclude you from a tax benefit: the qualified charitable distribution. Here’s what you should know about making one.
How do qualified charitable distributions work?
Individuals over the age of 70.5 can make a qualified charitable distribution from their traditional IRAs(individual retirement accounts).
At a certain age (70.5 or 72) you are required to start taking distributions from your traditional IRA accounts. These are called required minimum distributions. Unfortunately, this means income tax must be paid on these distributions even if you don’t need the money!
However, if you donate the distribution directly to a charitable organization—i.e., make a qualified charitable distribution—you won’t pay income tax on the donated amount. This can save you a significant amount of tax dollars, especially if you were going to donate cash anyway.
What kind of tax benefit could you expect?
The following example shows the potential tax savings. Say a 73-year-old single individual is in the 22% tax bracket and plans to give $5,000 to charity. Let’s also say this taxpayer’s standard deduction is greater than their itemized deductions. So, what would be the benefit of making a qualified charitable distribution over donating cash?
By using the qualified charitable distribution, the taxpayer could realize a federal tax savings of $1,100. If the taxpayer was a Minnesota resident, they could see an additional $340 of tax savings. They would experience these tax savings because the qualified charitable distribution is not included in their taxable income.
What should you consider before making a qualified charitable distribution?
While making a qualified charitable distribution is a great way to donate to charity during retirement, be sure to follow the rules and procedures for the transaction. The maximum qualified charitable distribution each year is $100,000. It’s also important to make sure the funds are transferred directly from your retirement account to the charitable organization. Be sure to work with your IRA account trustee and CPA to ensure the rules and limitation are followed and correctly reported on your tax return.
If you think you could benefit from this tax strategy, or if you have any additional tax questions, contact your JAK CPA today.