Personal Finanace

PERSONAL FINANCE: Tax-smart giving with qualified charitable distributions | Business

Thinking about making a large financial gift to charity? Looking for ways to reduce your taxes? If you’re retired and have IRA assets, the qualified charitable donation (QCD) tax rule might work in your favor. The qualified charitable donation rule allows IRA owners or those who have inherited an IRA to exempt their required minimum distributions (RMDs) from taxation through direct charitable giving. It’s especially pertinent given recent tighter rules on itemized deductions.

Here’s what you need to know to benefit from qualified charitable donations.

Who qualifies to make qualified charitable donations

The age requirements for required minimum distributions and qualified charitable donations are similar, but not the same. IRA owners become eligible for required minimum distributions any time during the year in which they turn 72 years old. For the qualified charitable donation rule to be in effect, you must have reached 70½ years of age. It’s a slight distinction that matters when you want to reap the qualified charitable donation tax benefit in your first year of eligibility.

Meeting required minimum distribution rules with a qualified charitable donation

Required minimum distributions can often be seen an annoyance, especially when you don’t need the money from your IRA. Yet failing to take required minimum distributions is a costly mistake. The IRS imposes heavy fines on taxpayers who skip this annual obligation. If you can get by without taking income from your IRA, you might want to consider doing well with the dollars you are required to withdraw. That’s where the qualified charitable donation can do double duty. The IRS states, “your qualified charitable distribution can satisfy all or part of the amount of your required minimum distribution from your IRA.” 

Eligible amounts

The qualified charitable donation rule applies to IRA distributions of up to $100,000 annually. The limit applies to the IRA owner and not a household. This means your spouse can also donate up to $100,000 (from his or her own IRA) through a qualified charitable donation in the same year.

Timing matters

The IRS applies the “first dollars out” rule to required minimum distributions from your IRA. That means whatever is withdrawn first from your IRA during the tax year goes toward satisfying the required minimum distribution. If you make a withdrawal as income earlier in the year, the withdrawal will reduce tax exemption under the qualified charitable donation rule. To get the maximum tax benefit, make your qualified charitable donation early in the year, before withdrawing funds for any other purpose.

Who can receive qualified charitable donation

Choose your charity carefully. Qualified charitable donations only apply to charities granted tax-exempt status by the IRS. This generally includes nonprofit groups such as churches, charities and other 501(c)(3) organizations. When in doubt, visit the IRS online tool to confirm nonprofit status. 

Eligible IRAs

You can make a qualified charitable donation from either a traditional or Roth IRA. However, the tax benefit associated with the qualified charitable donation rule only applies to owners of traditional IRAs since withdrawals from Roth IRAs are not taxable. Savings held in an employer-sponsored retirement account are not eligible; consider an IRA rollover if you want to take advantage of the qualified charitable donation rule in the future.

Tell your tax preparer

It’s important to properly report your qualified charitable donation at tax time. Under certain circumstances, the IRS may require an extra form.

Plan ahead

Talk to your financial advisor at or before the beginning of the tax year if you wish to satisfy required minimum distribution rules with charitable giving. Consult your tax professional to ensure compliance with both required minimum distribution and qualified charitable donation rules.

Bronwyn L. Martin is a Financial Advisor Chartered Financial Consultant with Martin’s Financial Consulting Group, a financial advisory practice of Ameriprise Financial Services Inc. in Kennett Square and Havre de Grace, Md. She specializes in fee-based financial planning and asset management strategies and has been in practice for 18 years. To contact her visit www.ameripriseadvisors.com/bronwyn.x.martin

Source

neallesh@yahoo.co.uk

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