|J. Ronald “Ron” Jackson
Denton Law Firm
555 Jefferson Street
Tax advantages utilizing your Minimum Required Distribution (MRD) from an IRA for a Qualified Charitable Distribution (QCD):
Like Having Your Cake and Eating it Too
If you are age 70½, and have a Minimum Required Distribution (MRD) due from your individual retirement account (IRA), you may be able to direct your IRA custodian to transfer part or all of your Minimum Required Distribution directly to a qualified charity of your choice and pay no income tax on the portion of your Minimum Required Distribution sent to the charity.
If this sound too good to be true, it isn’t!
In late 2017, Congress made a permanent change to the federal Income Tax Code that allows you to direct a transfer from your IRA to a charity of your choice. This contribution will be considered income and be considered tax free as long as the transfer does not exceed the lesser of your Minimum Required Distribution for the year or $100,000.
However, you need to be aware that you will not be able to deduct the contribution as an itemized deduction. With the standard deduction being increased in 2018, fewer individuals may elect to itemize their deductions.
There are a few technical requirements in order to qualify, but, they are easily met:
- You must be age 70½ or older to be eligible to make the Qualified Charitable Distribution (QCD) from your IRA to your designated charity.
- The maximum Qualified Charitable Distribution you can make in one tax year (most of us are on a calendar year) to any one or more qualified charities is limited to the lesser of your Minimum Required Distribution for the year or $100,000 whether made from one IRA or from multiple IRAs.
- The Qualified Charitable Distribution must be made by the trustee of the IRA to the qualified charity.
- The contribution would qualify for the charitable deduction, without regard to percentage limitations that may apply to your itemized deductions.
Some things to consider:
- The qualified charity must be a 501(c)(3) organization. This includes most churches, schools, hospitals and many of the local non-profits you may generally support. If you are in doubt as to the organization exemption status, ask them for a copy of their IRS issued exemption.
- The distribution must be made in cash before the close of the taxable year.
- If you were to have your IRA trustee to distribute more than your current year’s Minimum Required Distribution to the qualified charity you can only exclude from your taxable income your Minimum Required Distribution amount with the excess being taxable to you. For example if your Minimum Required Distribution for 2018 was $30,000 and you had $40,000 transferred directly to your church, the extra $10,000 would be taxable to you, but it you itemize your tax deductions for 2018, you could claim the $10,000 as an itemized charitable deduction.
- For married individuals filing joint tax returns, each one may have a Qualified Charitable Distribution made from their own IRA and each has the maximum limit of the lesser of their Minimum Required Distribution or $100,000 per year.
- The reduction in adjusted gross income by making a Qualified Charitable Distribution potentially reduces the percentage of your social security income that is taxed and other deductions and tax credits that may be dependent on your adjusted gross income. For 2018, the standard deduction was increased and many individuals may not be able to itemize their deductions.
In summary, If you are age 70½ and wish to consider a Qualified Charitable Distribution to exclude some or all of your current year Minimum Required Distribution from your IRA, it must be accomplished by December 31st.
If you have any questions feel free to call the Denton Law Firm to discuss the potential tax advantages of utilizing your IRA’s Minimum Required Distribution to make a Qualified Charitable Distribution.