Each year, millions of Americans make donations to charitable organizations and receive something in return – a tax break. However, the 2017 Tax Cuts and Jobs Act curbed this tax advantage by raising the standard deduction and, as a result, reducing the number of people eligible to claim a charitable deduction. For 2020, the standard deduction is $12,400 for individuals and $24,800 for married couples filing jointly. If the sum of your list of deductions is not greater than those amounts, there is no tax benefit to itemizing your deductions – which means you might not be able to claim your charitable donation.
Absent the ability to claim a deduction for charitable giving, some retirees just take their normal required minimum distribution (RMD) and bank the money, pay taxes on it and then make charitable gifts or tithe to their church on a monthly basis. For example, say your RMD is $10,000 and you pay 15 percent in taxes on this distribution. If you want to donate the money as a charitable gift, you’ll have only $8,500 left to do so.
However, there is a way to do this that will give you a tax advantage. A Qualified Charitable Distribution from an IRA enables retirees to claim their standard deduction and receive a tax benefit for their gift. The key is to arrange for the distribution to be made directly from your account custodian to the qualified 501(c)(3) charitable organization so that you do not take possession of the assets.
IRA owners may gift up to $100,000 each year, or $200,000 for a couple that files a joint tax return. Note that this option is available only for IRA owners over age 70½; it is not allowed for 401(k)s, 403(b)s, thrift savings plans, or other qualified plans. The QCD will be reported to the IRS and should be claimed by you on Form 1040 as an IRA distribution, but it will not be taxable. Another perk of this strategy is that the QCD can satisfy your annual Required Minimum Distribution (RMD). Be aware that if your QCD does not meet the full distribution amount required, you will have to withdraw and pay taxes on the remaining balance.
Another benefit of using an RMD for a charitable donation instead of receiving it as income is the reduction of your adjusted gross income, which can help minimize taxes on Social Security benefits, increase itemized deductions for medical expenses, and keep your Medicare premiums low.
Thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act, RMDs are not mandatory in 2020. That’s because the initial market losses triggered by the COVID-19 outbreak were substantial; by not requiring distributions this year, retirement accounts have more time to potentially recover those losses. However, if this isn't a concern and you expect to both take IRA distributions and donate to charity this year, then these distributions can be beneficial.
As always, it’s best to seek the advice of a tax professional in order to figure out what is best for your situation.
