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IS IT TRUE? CAN I REALLY? THERE MUST BE SOME CATCH?

These are some of the questions I received recently to my suggestion of giving your IRA income donation taxes to charity. My answer is a frank, ‘yes’. You can give some of your taxes to any qualified public charity. The “giving” I am talking about is called Qualified Charitable Deduction (QCD).

RECENT HISTORYGiving Tuesday and Qualified Charitable Deduction

Last December Congress made a permanent provision in the tax code. Please note, there are two catches. First, you must be age 70 ½ or older, and second, you must make the donation only from an Individual Retirement Account (IRA).

HOW IT WORKS

Annual required minimum distributions (RMD’s) from IRA’s must begin the year the taxpayer reaches age 70 ½ (or take two distributions the following year). These are before or after tax retirement accounts that you contributed to earlier in your lifetime and did not have to pay taxes on earnings in those years. Beginning at age 70 ½, the government mandates a distribution of those ‘before-tax contributions’ over your estimated life expectancy. The bad news is these RMDs are fully taxed at your maximum tax bracket each year. The good news is, if you give these distributions to a qualified public charity, you do not have to pay the income tax on that distribution.

The RMD rules do not apply to Roth IRA’s. The QCD cannot also be deducted on your personal tax return. Any non-IRA (like a SIMPLE Plan or 401k) retirement accounts must be rolled over to an IRA to be eligible for a QCD.

AN EXAMPLE

Let’s say your IRA RMD is $3,000 for this year and you are in the 25% tax bracket. Your $3000 distribution is taxed at your maximum tax bracket resulting in a tax of $750. You now have only $2250 remaining. You could then donate that $2250 to a qualified charity.

USING YOUR NEW INFORMATION

With your newfound knowledge about the Qualified Charitable Deduction RMD provisions in the tax code, you can opt to make your contribution a bit differently. You can contact the qualified public charity of your choice and arrange to have your $3000 RMD distributed directly from your retirement plan custodian or trustee to the charity. Now the charity gets the full $3000 AND you save paying the $750 income tax bill. You just gave a chunk of your income tax money to charity.

FUTURE GIFTS

You can use this tax saving/giving strategy every year you have an IRA RMD. This should be your first thought when planning charitable gifting each year. The maximum Qualified Charitable Deduction amount allowed from an IRA to a charity is $100,000 per year. Better yet, if you file a joint return, your spouse can also make a charitable gift and exclude from taxation up to $100,000.

GET HELP

As always, everyone’s tax situation is different so you should seek tax advice from a qualified tax professional, such as your accountant or a Certified Financial Planner (CFP®).

To learn more about Qualified Charitable Deductions please contact your Carnegie Investment Counsel adviser at (800) 321-23