Current tax law allows certain individuals the ability to transfer funds directly from their individual retirement account (IRA) to a charitable organization and receive favorable tax benefits.

This article briefly summarizes the features and rules of that opportunity to support charities and gain income tax savings.

RULES FOR IRA-TO-CHARITY TRANSFERS

A qualified charitable distribution (QCD) generally is a nontaxable distribution made directly by the trustee of your IRA to an organization eligible to receive tax-deductible contributions. You must be at least age 70-and-a-half when the distribution is made. The maximum annual exclusion for QCDs is $100,000, and the QCD can satisfy all or a portion of your required minimum distribution (RMD) from an IRA without having the distribution included in your income.

That privilege only applies to IRA accounts. It does not apply to other retirement plans. But where’s the advantage if we are simply eliminating both reportable IRA income and an offsetting charitable deduction?

Let us further explain this strategy.

BASIC FEATURES OF QUALIFIED CHARITABLE DISTRIBUTION

Due to recent tax law changes, many taxpayers now use the standard deduction in lieu of claiming detailed itemized deductions, which include charitable contributions. The standard deduction is indexed annually, and for 2019 is $27,000 for joint filers (both over age 65) and $13,850 for a single filer (over age 65).

As a result, in many cases, the charitable contributions are of little or no tax benefit.

EXAMPLE: RETIREES USING THE STANDARD DEDUCTION

Abe and Bev are both over age 70-and-a-half and drawing distributions from their IRAs of $4,000. They have total income of $100,000 and their itemized deductions for medical, taxes, and donations total $20,000, including $4,000 of charitable contributions, which is less than the standard deduction of $27,000.

Abe and Bev could arrange to have a $4,000 IRA withdrawal transferred directly to their church, in lieu of their regular charitable contributions. That would reduce $4,000 of IRA distributions they otherwise would have reported as income, saving nearly $500 of federal income tax.

Their deduction stays the same, as the standard deduction provides the same result.

REDUCING ADJUSTED GROSS

INCOME

If some of the required IRA withdrawal is transferred directly to charity, there may be additional tax savings by reducing the taxable portion of social security benefits. Also, reducing AGI could produce additional benefits from itemized medical deductions, the surcharge for Medicare Part B and Part D premiums for those with higher income, or the net investment tax for high income taxpayers.

EXAMPLE: MINIMIZING

TAXABILITY OF SOCIAL SECURITY

Dan and Ann are retirees and receive gross social security benefits of $24,000 per year, of which 85% are included in adjusted gross income. Their other gross income totals $49,000, including an IRA required minimum distribution of $5,000. If Dan and Ann decide to transfer the $5,000 IRA withdrawal directly to charity, they will reduce their taxable income by $9,200, the $5,000 IRA distribution and $4,200 of the reportable portion of their social security benefits, resulting in federal income tax savings of about $1,100.

We believe the qualified charitable distribution may provide income tax savings for most individuals over age 70-and-a-half. But, as always, there are rules in the tax law that must be complied with to accomplish these transfers properly. You should consult your tax adviser about your specific situation as to the potential tax benefits and a financial adviser that will help you carry out the goals that are most important to you.

Bernie Lamp, CPA, and Matt Bredow, financial adviser, both serve on MidMichigan Health Foundation’s Planned Gifts Committee in Alpena.