Taxpayers’ Guide to Required Minimum Distributions

Tax Saving Opportunities to Qualified Charitable Organizations

If you are a taxpayer over 70 ½ years of age, who makes donations to charitable organizations, you might consider contributing directly from an IRA. By doing so, you may remove existing income from your tax return while still making the desired charitable contribution. Tax-free distributions from an IRA may be made to a qualified charity, up to $100,000 each year. This limit is per individual IRA owner, so married couples filing jointly will both be allowed to exclude up to $100,000 from each of their own IRA’s.

Here’s how it works: Taxpayers must take required minimum distributions (RMDs) from their IRAs upon reaching age 70 ½. This income is generally taxable; however, any amount transferred directly from the IRA to a qualified charity is tax-free! In the year of transfer, you will not claim an itemized deduction for the charitable donation, as you will not report the IRA distribution in income. You are also not required to contribute your entire RMD to the charity. For example, if your IRA-RMD is $40,000, you could choose to donate only $3,000 directly to a charity, reducing your adjusted gross income (AGI) and taxable income from the $40,000 to $37,000, potentially decreasing limitations on certain itemized deductions (i.e. medical expenses), ultimately resulting in a lower tax rate. It is important to note that a distribution to a donor-advised fund will not qualify for this special treatment and contributions to non-operating private foundations will only qualify if the foundation elects to meet the conduit “pass-through foundation” rules in the year of the distribution.

Congress voted to make this a permanent part of the tax code in 2015 so that individual taxpayers no longer have to wait for last minute deals to plan their charitable giving. For charities, this is good information to disseminate to current and potential charitable givers. This strategy is a win-win for taxpayers and charitable organizations!

As always, Maddox Thomson stands ready to answer any questions you may have.

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