Tax Efficient Methods of Making Charitable Gifts

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Who This Applies To: Traditional IRA owners who are at least 70 1/2

Benefits to you: Making your charitable gifts directly from your IRA can result in three possible benefits

  • Reduction in taxable income
  • A decrease in the taxable portion of your social security benefit
  • Reduction in Medicare premiums

Summary: If you are receiving required minimum distributions (RMDs) from an IRA, IRS Rules allow for qualified charitable distributions (QCDs) to be made directly from the account. Individuals may make QCDs during the year that do not exceed $100,000 (per person if filing jointly). QCDs reduce the taxable portion of the withdrawal by the amount of the gift.

Because of recent changes in the tax code, the largest potential benefit derived from a QCD is a reduction in taxable income. The new tax law has doubled the standard deduction for both individuals ($12,000) and spouses filing jointly ($24,000). Those who are at least 65 years of age receive an additional standard deduction of $1,300. To offset those increases, some itemized deductions were taken away or limited. This presents an opportunity for those who make charitable gifts by cash or check and have little or no mortgage interest or medical deductions. Those individuals should consider making their charitable contributions as QCDs.

The abbreviated example below shows how taxable income could be reduced for a married couple, both at least 65 years of age, with a $50,000 RMD. For simplicity, we have ignored other income sources.

Table showing how taxable income could be reduced for a married couple, both at least 65 years of age, with a $50,000 RMD.
*Table updated January 25, 2019.

This simple example does not reflect any secondary benefits that may result in a reduction of taxes on social security benefits or a reduction in Medicare premiums.

How a QCD can be implemented: The custodian of your retirement account will forward the charity a check or facilitate an electronic transfer based upon your signed instructions. Similarly to how you maintain records of charitable gifts taken as itemized deductions, you should also maintain records when making a QCD. Make your tax preparer aware that you made a QCD so that the gift can be properly accounted for at tax filing. Contact your advisor with questions or for assistance.

*Tax information provided by CCM should not be solely relied upon. Instead, one should conduct their own independent research or consult a tax professional.

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