With the recent changes in the tax code, you might be wondering what the most tax-effective ways are to continue to give to your favorite charities. Well, if you are over 70½ and you have an IRA, you have a nice option available to you. It allows you to do well by doing good!
When IRA holders reach the age of 70½, they must start taking a Required Minimum Distribution (RMD) from their IRA. When they take that distribution, they have to add it to their adjusted gross income (AGI) and pay federal taxes on it.
However, they have another, more tax-efficient, option. They can instead direct their IRA custodian to make a tax-free gift directly from their IRA to a qualified public charity, such as a local 501(c)3 organization. This Qualified Charitable Distribution, or QCD, will not count as income for the donor, so no additional taxes are incurred and no higher tax bracket looms, but the QCD can count toward satisfying the donor’s RMD.
Here’s how it works, using the Fort Atkinson Community Foundation (FACF) as an example of a qualified public charity. An IRA holder contacts their IRA custodian and requests that the custodian make a donation from their IRA account directly to the FACF. Up to $100,000 can be donated from an IRA tax-free. The gift must go directly from the IRA custodian to the charity, and the amount of the gift satisfies all or part of the RMD.
The IRA holder would then contact FACF to let us know the gift was coming and to indicate which fund or funds it was intended to support.
That’s it! That’s the story of how a QCD from an IRA met an RMD and helped FACF!
One of the extra benefits of directing your gift to FACF instead of one specific charity is that we can take your one gift and split it up in any way you desire to support a variety of project funds or non-profit organizations who hold designated funds with us.
When you do your taxes, it is important to report the amount of the QCD to the IRS so you don’t get taxed on the withdrawal, since the QCD should not be reported as income. IRA custodians are not required to report this information on their 1099-R, so it is up to you to report it.
Keep in mind, your gift must be processed by Dec. 31st to receive the benefit for that year. And if you are married, your spouse is also eligible to contribute up to $100,000 from their IRA.
If you’d like more information or would like to talk with someone from the Fort Atkinson Community Foundation about making a qualified charitable distribution from your IRA, please contact Sue Hartwick, executive director of FACF, at (920) 563-3210 or via email at firstname.lastname@example.org. Be sure to first consult with your tax preparer or financial advisor to learn what is best for you.