How to reduce your taxes and still donate to charity using a traditional IRA
The Tax Cut and Jobs Act of 2017 made significant changes to the tax code, including increasing the standard deduction for married couples over age 65 in 2019 to $27,000. This decreased the tax advantages of some charitable donations that were traditionally given with after-tax dollars. To combat this, we explore the way in which individuals can reduce their taxes and still donate to charity below.
Qualified Charitable Distribution
Once an individual reaches age 70 ½, they need to begin to take their Required Minimum Distributions (RMDs), from their traditional IRA (distributions are taxable to the individual once they receive them). For tax planning purposes, if you give some of your charitable donations directly from your IRA, it will likely reduce your taxes in 2019. This is referred to as a Qualified Charitable Distribution (QCD), which ultimately authorizes your IRA custodian to make a distribution to a charity rather than to you. The QCD is only available to those over age 70 ½.
Using this approach, you can have your IRA custodian directly send your church or favorite not-for-profit a check as either a one-time donation or monthly check depending on your preference. At the end of year, you will receive a Form 1099-R for the full amount of your IRA distributions, and you will need to let your CPA know what charitable donations you made from your IRA. The tax return should reflect the gross amount received, but only show the taxable amount by subtracting the qualified charitable distributions. You will also need a charity acknowledgement from the not-for-profit organization.
Here is an example of the benefit of using a QCD from your IRA’s RMDs. A taxpayer over the age of 70 ½ contributing all of their charitable donations out of their IRA would maximize this tax advantage strategy.
As you can see in our example, the same amount was given to charity, but the taxable income is lower by $17,000; also resulting in lower federal and state taxes. If your marginal tax rate is about 32%, you will save an estimate of $320 for every $1,000 given to charity as a QCD IRA distribution.
This strategy is powerful and will allow those over the age of 70 ½ to continue to give while reducing their taxable income, perhaps even allowing you to leverage larger charitable contributions while staying within your budget.
Please consult your personal tax advisor to discuss your options.
*Investment advisory services offered by Andrew Paoni, not David Sauerburger.
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.