Taking Required Minimum Distributions From Your IRA?

By David Koehler, Vice President, Donor Engagement

Save on Taxes through a Qualified Charitable Distribution.

We’ve entered a new era in tax planning, and if you are like the majority of Americans, you will now choose the standard deduction over itemizing.

Under the new tax law, the standard deduction has doubled to $12,000 for single filers and $24,000 for married couples. Additionally, those over age 65 can add deductions of $1,600 for singles and $2,600 for couples.

This means a married couple, with each spouse age 71 years, has a standard deduction of $26,600. With deductions for local and state taxes now capped at $10,000, if this couple also made charitable gifts of $10,000, their itemized deduction would only be $20,000. They would receive a larger tax benefit by taking the standard deduction of $26,600.

However, when you claim the standard deduction, you receive no additional tax benefit for what would otherwise be itemized deductions, including charitable giving. 

Thankfully, all is not lost. If you are taking Required Minimum Distributions (RMDs) from your traditional IRA, there is a smart strategy that will still allow you to obtain a tax benefit from your giving, even when you take the standard deduction.

Enter the Qualified Charitable Distribution (QCD).

If you are 70.5 or older, you are eligible to transfer up to $100,000 from your IRA directly to a qualified charity. Any amount transferred as a QCD counts toward your RMD and reduces the taxable amount of your IRA distribution. This lowers your taxable income and reduces your overall tax liability.

When this same 71-year-old couple gives $10,000 to charity directly from their IRA as a QCD, they will reduce their taxable income by $10,000 and still get to claim the $26,600 standard deduction. If this couple is in the new 22 percent tax bracket, using this strategy would save them $2,200 on their federal taxes alone.

Important note: to make a QCD, your gift must be transferred directly from your IRA to a qualified charity. Once you receive a distribution from your IRA, it’s too late to use this strategy with those dollars—the distribution will count as taxable income, and you can’t send it back. If you are set to automatically receive your RMD each year and you want to give in this way, you may wish to adjust your payment and instead request two distributions—a QCD and any remaining amount of your RMD.

If you are interested in making a charitable distribution from your IRA, speak with a tax advisor to learn if this strategy makes sense for your unique situation. To move forward with a QCD, you’ll need to work directly with the custodian of your IRA. They’ve become quite familiar with this over the past few years.

Madison Community Foundation can also help facilitate the process, and, as a qualified charity, we offer numerous options for how your gift can make a difference. While your QCD cannot be used to establish or add to a donor advised fund, it can create or add to permanent named funds that benefit your favorite charities.

Your gift to MCF can also support strategic grantmaking throughout Dane County to causes that are important to you, such as local conservation, helping women and girls, basic needs, education, the arts, and more. Learn more about these Field of Interest Funds, which help you to make real impacts for our community.

Transfers from your IRA can take time and the process can vary among IRA custodians. It’s never too early to begin planning for the year ahead, but if you intend to make a QCD by year-end, we recommend starting the process no later than December 15.

MCF is here to help. Please contact our Donor Engagement team with questions or if we may assist you in your giving: 608-232-1763 / legacy@madisongives.org.

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