Can I Avoid Taxes Altogether on my IRA Withdrawal?
by Dennis Doble with contributions from Michael Gurney and Alison Wilcox
Giving your RMD to charity can have favorable tax consequences. If you have retirement accounts and are over age 72, you are subject to annual Required Minimum Distributions (RMDs), essentially required withdrawals from your IRAs and other tax-deferred accounts. These RMDs are taxed as income, and depending upon your circumstances, may even push you into a higher tax bracket. If you are someone who donates to charity, a Qualified Charitable Distribution (QCD) might be a good option to both minimize current income for tax purposes, as well as maximize the amount of your charitable donation.
How does it work? Normally, an RMD is distributed to the individual account owner who then pays income tax on the distribution. If the individual then wishes to make a charitable contribution, he or she is using after tax dollars to contribute to their chosen charity. However, a QCD allows you to distribute your RMD directly to your choice of charity, and as such is never income to you as a taxpayer. The QCD doesn’t have to be the full amount of your annual RMD, either. You can choose the amount that you wish to distribute as a QCD and take the remainder for yourself. By utilizing a QCD, you avoid increasing your taxable income, and donate to your chosen charity in pre-tax dollars, which maximizes your contribution and increases the benefit to the charity.
Qualified Charitable Distributions are a great option, but they do have a couple of requirements. The first is that the recipient of the QCD must qualify as a charity as defined by IRS code 501(c)(3). The great thing is that most public charities meet these requirements, but it is still a good idea to check with a tax professional on this matter. The second requirement is that the value of the QCD may not exceed $100,000 per year. You may make as many QCDs as you wish, as long as the total amount of the QCDs does not exceed that $100,000 limit each year. And lastly, the contribution needs to go direct to the Charity. You cannot take possession of the funds and subsequently choose to send them to the 501(c)(3) organization.
And there is not a special tax code that signals to your CPA that a QCD was executed, so you either have to remember to tell him/her or work with an advisor that will make sure that the CPA knows when filing your taxes. We hope this article was helpful. Feel free to contact us with questions regarding this strategy.
