By Gayle Corley
Corley Law Firm
Arkansas PBS Foundation Board President
As an estate planning attorney, I am often asked how to get the biggest tax break that is legally possible – especially as we approach the holiday season. One easy way to accomplish this is to make charitable contributions directly from an IRA (individual retirement account).
If you own an IRA and are at least 70 ½ years of age, you may donate up to $100,000 per year to charity directly from your IRA. Such a donation is known as a “qualified charitable distribution” or “QCD.” If you’re married, each spouse can do this, for a total QCD per married couple of $200,000.
Any QCD must be made directly from the IRA trustee to the charity. If you withdraw funds from an IRA and then donate the funds to charity, that withdrawal will be taxed. The amount of a withdrawal from an IRA is treated as ordinary income and added to the IRA owner’s other income when calculating the income tax due. And, you would have to itemize deductions on your income tax return to get the benefit of the donation. So be sure to talk with your IRA trustee or financial advisor to make sure your gift is made directly from your IRA to the charity.
IRA owners who are at least 73 years of age, and so are required to take a “required minimum distribution” or “RMD” each year, can count a QCD toward the RMD for that year. If an IRA owner instructs the IRA trustee to distribute the RMD (or some portion of it) directly to a charity, no income tax will be incurred on the portion of the RMD given directly to charity as a QCD. If that sounds like alphabet soup to you, be sure to talk with your IRA trustee or financial advisor before taking any action.
An IRA owner should receive a Form 1099-R for any IRA distribution, whether a regular (taxable) distribution, or a (non-taxable) QCD. And, the IRA owner must report any distribution on his or her income tax return for the year it was made. However, because the amount donated to charity by a QCD is not taxable income, the IRA owner does not have to itemize deductions on the income tax return to get this benefit. The benefit is received automatically by lowering your taxable income.
If you’re interested in making a charitable gift from your IRA, just remember that you have to complete the gift by the last business day of the calendar year in order to get the benefit on this year’s taxes.
If an IRA owner wishes to make charitable contributions upon his or her death, the most tax-advantaged way to do that is by naming a charity as a beneficiary of the IRA, whether for a dollar amount or a percentage. While a spouse and certain other beneficiaries may withdraw the balance of the IRA over their lifetime, most children and grandchildren of the IRA owner must withdraw the full balance within 10 years after the IRA owner’s death. And any individual named as beneficiary will have to pay income tax as monies are withdrawn. A charity will not have to pay that tax.
There are so many ways to support the causes that are important to you while also benefiting your tax situation. Talk with your IRA trustee or financial advisor to determine the best decision for you!
Happy Holidays and thanks for being part of the Arkansas PBS audience!