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Turn your RMD into a Charitable Contribution

You may be able to turn your required minimum distribution into a charitable donation if you are over 70-1/2 and own a traditional Individual Retirement Account (IRA).

How it works: if you are over 70-1/2 and own an IRA, the IRS requires you to take a certain percentage out of that account each year. The amount changes every year according to the balance in the account at the end of the year and your age.

There is a chart on the IRS website if you would like to know how this works. The group that manages your IRA usually takes care of this “required minimum distribution” (RMD), but make sure to follow up each year. There is a big penalty for not withdrawing the full RMD amount.

The penalty is 50% of the amount that should have been distributed but wasn’t.

With the increase of the standard deduction in the past few years, many taxpayers do not benefit by itemizing their tax deductions. (The standard deduction for a person 70-1/2 in 2022 who is single starts at $14700, and married filing joint starts at $27300. If you have questions about this, please call our office.) This means that many contributors may not recognize a tax benefit for their contributions.

Now, I realize that the tax breaks are not good motivation for being generous, but the focus of this blog is to maximize the result of the tax return.

Here is an option if you are subject to RMD’s: You may be able to make a Qualified Charitable Distribution (QCD) directly to a charity, which lowers your taxable income. These distributions turn potentially taxable distributions into excluded income. Many retired taxpayers could benefit from lowering their adjusted gross income for other reasons which do not stop at just paying less tax.

These are the guidelines:

  • The taxpayer has to be over 70-1/2 at the time of the distribution.
  • The QCD is made directly by the trustee of the IRA (but not a SEP IRA or SIMPLE IRA).
  • The QCD may be used to satisfy all or part of an RMD but is not limited to that amount.
  • The QCD is limited to $100,000, annually, per taxpayer.
  • A charitable deduction cannot be claimed as an itemized deduction for the amount of the QCD not included in income.
  • The QCD cannot be distributed to the taxpayer and then donated. It must be transferred directly to the charity. If a check is issued, it must be made payable to the charity.
  • The charity must be a qualifying charity. Donor-advised funds are not eligible. The IRS explains qualifying charities.

Call our office if you believe you may be eligible to take advantage of a Qualified Charitable Distribution, and would like more information.

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Image courtesy: R Carney

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