From the Council of Nonprofits:
“The IRA charitable rollover allows individual taxpayers older than 70 ½ years to donate up to $100,000 from their individual retirement accounts (IRAs) and Roth IRAs to charitable nonprofits without having to treat the withdrawals as taxable income. The charitable giving incentive expired on December 31, 2014 and must be renewed by Congress before individuals may utilize the incentive. The Council of Nonprofits supports the extension and expansion of the IRA charitable rollover. To learn more, please visit our site on the America Gives More Act and the Supporting America’s Charities Act.
Why It Matters
The IRA rollover offers older Americans the opportunity to give back to the causes they support in their communities without suffering adverse tax consequences. The giving incentive is of particular value to individuals who do not claim itemized deductions on their tax return because the funds are sent directly to nonprofits from IRA accounts and are never counted as income.”
“How To” from Emily Brandon of US News:
What is a Qualified Charitable Distribution?
A qualified charitable distribution is an IRA withdrawal that is paid directly from your IRA to a qualifying charity. While income tax is normally due on each traditional IRA distribution, the account owner does not need to pay taxes on the amount transferred to charity.
How to Set Up an IRA Qualified Charitable Distribution:
- Meet the QCD requirements.
- Satisfy required minimum distributions.
- Calculate your QCD tax break.
- Set up a direct transfer to a charity.
- Select a qualifying charity.
Meet the QCD Requirements
IRA owners must be age 70 1/2 or older to make a tax-free charitable contribution. Those who meet the age requirement can transfer up to $100,000 per year directly from an IRA to an eligible charity without paying income tax on the transaction.
If you file a joint tax return, your spouse can also make a charitable contribution of up to $100,000, meaning couples can exclude up to $200,000 of their retirement savings from income tax if they donate it to charity. If you donate more than the maximum allowable amount, it is considered income and could be subject to income tax. Qualified charitable contributions must be made by Dec. 31 each year in order to exclude that amount from taxable income.
Charitable contributions can only be made from IRAs, not 401(k)s or similar types of retirement accounts. So you might need to roll funds over from a 401(k) to an IRA if you want to make tax-free charitable contributions part of your retirement plan.
ou don’t need to itemize your taxes in order to make an IRA charitable distribution. However, you cannot additionally claim a charitable contribution tax deduction on a charitable distribution from your IRA.
“You are not getting taxed on this money, so you don’t get to count it as a charitable deduction in addition,” says Jill Schlesinger, a certified financial planner in New York. Remember to request an acknowledgment of the donation for tax purposes if you don’t receive it automatically.
Satisfy Required Minimum Distributions
An IRA charitable contribution satisfies the annual minimum distribution requirement for your IRA. “You can mitigate the required minimum distribution if you make a qualified charitable donation from the IRA,” says Steven Podnos, a certified financial planner for Wealth Care in Cocoa Beach, Florida.
You can donate part of your required distribution to charity and withdraw the rest of it as retirement income as long as you meet the minimum distribution requirement by the end of the calendar year.
“Oftentimes they don’t donate the full distribution, but break it up and send it to multiple destinations,” says Michelle McKinnon, a certified financial planner and senior wealth advisor at Payne Capital Management in New York City. “A lot of people already do give, so why not give from your IRA with funds you have to take out anyway?”
Calculate Your QCD Tax Break
A $100,000 charitable contribution from your IRA could save you tens of thousands of dollars in taxes, depending on your tax rate. But you don’t have to make a huge donation to benefit from this tax break. For a retiree in the 24% tax bracket, an IRA charitable contribution of $5,000 could reduce your income tax bill by $1,200. Even a $1,000 donation would save you $240 in taxes. The benefits of making a charitable contribution from your IRA are even bigger for those in higher tax brackets.
“Essentially what happens is you are not receiving this distribution, you are not getting taxed on the distribution, it goes straight to the charity,” Schlesinger says. “Most people actually need the money that’s coming out of their retirement account, but if you are lucky enough that you don’t need it, one of the cool things that you can do is satisfy your required minimum distribution by taking this money and directing it directly to the charity.”
Set Up a Direct Transfer to a Charity
Funds must be transferred directly from the IRA to an eligible charity by the IRA trustee in order to qualify for the tax break. If you withdraw the money from your IRA and later donate it, it won’t qualify as a tax-free qualified charitable distribution.
“You have to make the distribution check payable to the charity directly,” Schlesinger says. “If it is somehow sent to you by mistake, that is not considered a qualified charitable distribution.”
Select a Qualifying Charity
A charity must be a 501(c)(3) organization to receive tax-free IRA charitable contributions. Charities that do not qualify include private foundations and donor-advised funds. You can distribute your required minimum distribution to multiple charities in the same year.