Q. This is my first year to take a required minimum distribution from my IRA. Fortunately, I don’t need this money to meet expenses and I really don’t want to pay more income tax than I have to. A friend told me that I could donate all or some of the distribution to a qualified charity and the tax deduction would help reduce my taxes. Another friend told me they read that in the past you could donate directly to a charity from your IRA in the year in which you turn 70 1/2 . Is this still an option and if so, is there any reason to figure out how to do this versus just taking the required minimum distribution and then writing a check to the charities of my choice? If I can make a charitable donation directly from my IRA, do I still get a charitable deduction for the amount donated?
A. The opportunity to make a charitable deduction from an IRA and have it count toward your required minimum distribution was finally made permanent with the Protecting Americans from Tax Hikes Act of 2015. Now eligible IRA owners can plan ahead to make what is called a qualified charitable distribution. For almost 10 years the rules for making a qualified charitable distribution have been on-again, off again, lapsing and then being reinstated every other year. IRA owners who have attained age 70 1/2 are permitted to make qualified charitable distributions of up to $100,000 per year.
The best way to make a qualified charitable distribution is to transfer money directly from your IRA to a qualified charity. You could receive a check from your IRA but to qualify as a qualified charitable distribution it must be made out to the charity and then forwarded to the charity. A qualified charitable distribution will be excluded from your taxable income. If you take an IRA distribution and subsequently write a check to the charity, the distribution will be included in your taxable income even if the amounts distributed and donated are the same. You won’t get a tax deduction on the amount donated via a qualified charitable distribution but you won’t claim that amount as taxable income.
Normal required minimum distributions increase adjusted gross income which may cause you to lose some tax benefits such as: reduction of itemized deductions, reduction of passive loss deductions, increased Medicare premiums and/or causing a greater portion of your Security benefits to be taxed. By making a qualified charitable distribution, your adjusted gross income will not be increased and some of these tax benefits may not be lost.
Required minimum distributions are presumed to be satisfied by the first distribution from the IRA. Once a required minimum distribution is made it is irrevocable and cannot be rolled back into an IRA. So, for any readers that have already received their required minimum distribution for 2016 know that you can still make a qualified charitable distribution but it cannot be used to satisfy your 2016 required minimum distribution.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624