Supporting Kingdom work and getting a tax break
by Christopher L. Kelly, Esq.
If you are required to take required minimum distributions (RMD) from your IRA, by now you have probably received a notice from your IRA provider about the amount you have to take out in 2020 to avoid a 50 percent tax penalty. You will have to pay federal income tax on your RMD — unless you direct it to a charitable organization.
Your IRA provider is allowed to pay that RMD directly to a qualified charitable organization (like your church or other Baptist cause), and the amount paid to the charity is completely non-taxable to you. That means you don’t have to include it with the rest of your income for the year, but it is still credited towards your RMD, so it satisfies the legal requirement. This donation is called a qualified charitable distribution (QCD).
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 in order to produce a tax benefit to the donor. The standard deduction is even higher for persons over 65 years of age ($13,850 for individuals, $27,000 for couples) which means the total itemized deductions must be even higher (than for those under 65) before the donor can use them. Thus, the QCD is different from other charitable contributions, as it does not have to meet any minimum threshold before it is beneficial to the donor. The QCD is simply not included in your taxable income for the year.
Also, since Medicare premiums for Parts B and D are based on your household income, having a lower income may result in some cost savings for your insurance.
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 it makes the check payable to the charity and gives it to the donor for delivery to the charity).
It’s also important to remember you cannot make a QCD from every type of IRA, nor from other types of retirement plans. Your financial advisor will be able to tell you whether or not you are eligible. Also, not every charity qualifies to receive the QCD, so please be sure to check with the charity prior to making the donation.
If you know you are going to make a contribution to your church or other charity this year, and you also have to take an RMD, talk with your financial advisor about making them one and the same. Not only will you use your RMD to benefit Kingdom work, but you’ll reduce your tax bill for 2020 at the same time.
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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 general 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.