As we begin 2019, people aged 70 1/2 and older who own an Individual Retirement Account (IRA) will begin getting notices from their IRA providers about their Required Minimum Distribution (RMD) for 2019. The RMD is the amount (calculated on the owner’s life expectancy) the IRA owner must take out in 2019 to avoid a significant tax penalty of 50 percent of the RMD amount. The RMD is the government’s attempt to recover some of the tax deferral the owner has enjoyed over the years, as any distribution from an IRA is taxable to the owner in the year of distribution.

However, if you are an individual aged 70 1/2 or older with an IRA and have charitable inclinations, there is still a way to save income taxes for 2019: the qualified charitable distribution (QCD). The IRS allows your IRA provider to pay your RMD directly to a qualified charitable organization (like your church or other Baptist cause). If you elect to do this, the distribution paid to the charity is completely non-taxable to you, meaning you do not have to include it with the rest of your income for the year. Furthermore, the amount paid to the charitable organization is credited towards your RMD requirement for the year.

For example, Bank of Galilee notifies John T. Baptist he must take $10,000 from his IRA in 2019 in order to satisfy his RMD. John is in the 22 percent income tax bracket, and he already knows he will give at least this much to his church in 2019. Rather than taking the distribution, paying taxes on the distribution, and then writing a check to the church out of the remaining amount, John can direct the bank to send $10,000 from his IRA directly to the church. By doing so, John saves $2200 in income taxes, satisfies the RMD requirements and supports the Kingdom work of his church with the contribution.

This tax savings technique has become even more important in recent years due to the higher standard income tax deduction. While the higher standard deduction is better for the vast majority of Americans, it reduces and even eliminates the possible tax benefits of giving to a charity, since the amount given to charities (along with other deductible items) must exceed the standard deduction to produce a tax benefit to the donor. The standard deduction is even higher for persons over 65 ($13,600 for individuals, $26,600 for couples). Thus, the QCD is even more valuable for those who can utilize it.

A QCD does not have to be aggregated with other deductions before you receive a tax benefit. It is a standalone, dollar-for-dollar reduction in your taxable income. Even if you do not have deductions exceeding the standard deduction and are consequently unable to itemize your taxes, you still can take advantage of the tax savings in reduced income taxes created with a QCD. In fact, it may have even greater benefits for you, as you will be keeping your reported income lower, which might further lower your Medicare premiums for parts B and D that are based on household income.

As with any government tax strategy, there are rules to follow:

  • You can only distribute $100,000 from the IRA to qualify for QCD treatment.
  • You must have an accompanying receipt from the charitable organization to prove it received the distribution.
  • The distribution must be made directly to the charity to qualify (either the IRA provider sends the check directly to the charity or makes the check payable to the charity and gives it to the donor to deliver).

*Note that you cannot make an RMD from all types of IRAs, nor from other retirement plans, but your financial advisor will be able to advise you as to your eligibility.

With most of 2019 and the year’s charitable giving yet to be made, it is a great time to look at your RMD amount for this year. If you know you are going to be making contributions to your church or other charity, then it is worth a conversation with your financial advisor. This time next year, when you are calculating your 2019 income taxes, you will be glad you did.

Please note that the advice offered in this article is not intended to be construed as tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice for the reader. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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