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Charitable Contributions from your IRASubmitted by Townsend Asset Management Corp. on April 25th, 2017
If you are age 70 ½ or older you are probably familiar with the requirement that you must begin withdrawing money from your retirement plans. The “required minimum distribution, or “RMD” is determined each year based on your current age and the value of your various retirement plans.
But what if you don’t need these distributions and don’t want to pay the federal and state taxes due on the amount withdrawn? Tough! If you don’t take out the RMD and you-know-who finds out, you are not only taxed anyway, but you are also subject to a 50% excise tax on top of the income tax. Ouch!
Ten years ago, the Pension Protection Act of 2006 introduced a new wrinkle, allowing a taxpayer who is 70 ½ or older to distribute up to $100,000 per year directly from their IRA to an eligible charity without first being taxed on the distribution.
For some years, this provision was temporary and was a political football, bouncing back-and-forth and it was often late in the year before anyone knew if it would still be in force for that year, making tax planning very difficult. Now this provision is permanent, and taxpayers should carefully consider utilizing this option.
If you contribute to a charity directly from your IRA and the contribution is not considered to be a taxable distribution from your IRA, the next question you might ask is, “Do I get to take a deduction on my tax return for the contribution?” Unfortunately, the answer is “no,” because since you avoid having to report the IRA distribution as income you are not allowed to claim an itemized deduction for the contribution.
So what difference does it make whether you contribute directly from your IRA vs. taking a regular taxable distribution and then making a charitable contribution? Wouldn’t you end up with the same result? No, you wouldn’t, and here’s why.
If you report a taxable distribution from your IRA, it increases your “adjusted gross income” on your tax return. Because of this increase in adjusted gross income, there are several negative consequences:
- Your Social Security benefits may be subject to higher income taxes.
- Your itemized deductions for medical and miscellaneous items may be reduced, since you can only deduct the amount in excess of a certain percentage of adjusted gross income.
- Higher income taxpayers may have their personal exemptions and overall itemized deductions reduced as adjusted gross income exceeds certain levels.
Because of these negative consequences, contributing to a charity after taking a taxable distribution from your IRA is not as attractive as simply donating directly from your IRA. In addition, if you do not itemize deductions and just claim the standard deduction on your tax return, then there is even more reason to make your contribution directly from your IRA, since you wouldn’t be claiming the itemized charitable deduction at all.
Some important points to keep in mind:
- You do have to be age 70 ½ or older at the time of the gift, not just turning 70 ½ in the year of the gift.
- A qualified charitable distribution may not exceed $100,000 per individual in any one year.
- A qualified contribution may be counted towards the annual RMD that individuals over 70 ½ must take anyway.
- This only works with IRAs. You cannot make qualified charitable contributions from 401(k), 403(b) or other accounts.
- North Carolina does not recognize this provision, so you still have to report the full IRA distribution as taxable income on your N.C. return – but if you itemize deductions on your N.C. return, you can add the IRA charitable distribution to your other charitable contributions and deduct it.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm located in Raleigh, North Carolina. Email: Gerald@AssetMgr.com