Some people may be in for a surprise when they file their 2018 tax returns and experience the impact of the recent changes in the tax code. For example, in prior years, those who itemized deductions on Schedule A with their tax return could take a tax deduction for money or property they donated to charities and other 501(c)(3) organizations during the year. While qualifying donations are still tax-deductible, beginning with the 2018 tax year, fewer people will be itemizing deductions and will simply claim the standard deduction (generally $24,000 for a married couple filing jointly) because it exceeds the amount they would typically itemize.
Although most people aren’t donating to charities solely for the benefit of the tax deduction, they may want to explore new giving strategies, including donations made directly from their IRAs through Qualified Charitable Distributions.
For IRA Owners
If you own an IRA or are the beneficiary of an inherited IRA, and you are age 70½ or older, you may take money out of your self-directed IRA tax-free to donate to a qualified charity. The IRS calls this a “Qualified Charitable Distribution” (QCD).
A QCD may be used to satisfy the otherwise taxable required minimum distribution (RMD) IRA owners are required to take each year after reaching age 70½ or the life expectancy payment beneficiaries must take each year from an inherited IRA. For example, if your 2018 RMD is $10,000, and you made a $5,000 qualified charitable distribution for 2018, you would only have to withdraw another $5,000 to satisfy your 2018 RMD.
Rules for Making a Tax-Free QCD
- Your self-directed IRA custodian must pay the donation directly to the qualified charitable organization; you cannot take payment from the IRA first. But, you may hand-deliver a QCD check made payable to the qualifying charitable organization.
- The donation must be made by December 31 of the tax year. You may donate up to $100,000 per year ($200,000 per married couple, filing a joint tax return).
- A QCD must be made from assets that would otherwise be taxable in the year they had been withdrawn from the self-directed IRA.
- If a traditional self-directed IRA includes nondeductible contributions (or rollovers of after-tax dollars from an employer plan), a QCD will be first considered to be paid out of the IRA's taxable assets (deductible contributions, rollovers of pre-tax employer plan dollars).
- A QCD cannot be made from a SEP or SIMPLE IRA that continues to receive contributions under the employer's SEP or SIMPLE IRA plan.
You can use the IRS’s online tool, Tax Exempt Organization Search: https://apps.irs.gov/app/eos/, to find organizations that qualify to receive a QCD. The same types of organizations that qualify for a tax-deductible contribution generally may receive a QCD:
- Churches, museums, hospitals and other organizations operated for charitable, religious, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals
- Veterans’ organizations
- Fraternal societies and associations
- Governmental or political subdivisions of a state (e.g., city police department)
Plan Now
All QCDs for the 2018 tax year must be made by December 31, 2018. If you missed that date, you can start planning now to make a QCD in 2019.
- Contact your self-directed IRA custodian and the charitable organization of your choice to obtain the necessary information to transfer assets directly from your IRA to the charity.
- Follow the proper procedures for making a QCD to make certain that your donation is tax-free.
- Document the asset transfer process and retain all related documentation in your tax files. You must have the same type of acknowledgment of your contribution from the charitable organization that you would need to claim a tax deduction for a charitable contribution.
To learn more about QCDs with Mainstar Trust