Tax tip: Charitable donations directly from your iRA

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Old 01-22-2017, 06:41 AM
Bloom&Company Bloom&Company is offline
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Default Tax tip: Charitable donations directly from your iRA

Charitable Donations directly from your IRA

Finally in 2015 Congress passed a law making permanent a provision allowing taxpayers to make charitable contributions directly from their IRA, potentially saving significant tax.

The law allows people who are at least 70 ½ years old to contribute up to $100,000 to a charity, called a Qualified Charitable Distribution (QCD).

The tax benefit from this can be substantial in the following cases, to name a few;
1. You currently use the standard deduction, and do not itemize.
2. Potentially reduces the amount of tax you owe on your Social Security Benefits.
3. Reduces the Net Investment Income Medicare surtax.
4. Medicare premium costs

If you utilize the QCD, then the amount you report as income from your IRA on page 1 of the tax return is reduced by the QCD. This makes your Adjusted Gross Income lower.

If you do not itemize your deductions, then you are using the standard deduction which is $15,200 for married couples in 2017. Therefore, by utilizing the QCD from an IRA you still get your standard deduction but your taxable income is reduced by the QCD, saving you the amount of the QCD X your tax bracket. For example, you donate $10,000 from your IRA and you are in the 15% bracket then you save $1,500 then if you had just written a check.

Additional tax can be saved by reducing the tax imposed on Social Security benefits. Social Security benefits are taxed on a sliding scale. Low income taxpayers do not pay any tax on the benefits and higher income people pay tax on 85% of the benefit. Often taxpayers in the 15% tax bracket are in between the 0% and 85% amounts. In the above example, it is likely that by donating the $10,000, it will reduce the amount of Social Security that is taxed maybe by at least 50%, therefore now saving an additional $750 ($5,000 (1/2 of the QCD x 15% TAX RATE. This combined with the savings by using the standard deduction is now up to $2,250.

For higher income people, although they would not save tax on the Social Security Benefits however, it could save on the Medicare surtax or Medicare premiums, and would also benefit if they use the standard deduction.

Important facts to know about QCDs

1. You must want to make the charitable donation. Meaning you wouldn’t do this just to save taxes you must really want to donate to a
charity.

2. You must be at least 70 ½ years old on the date of the distribution.

3. Maximum amount in any 1 year is $100,000.

4. The distribution must be paid directly from the IRA custodian to the charitable organization. You cannot write a check and get reimbursed.

5. This does not work for distributions from 401(k)’s, SIMPLE IRA’s, or SEP IRA’s but does work from inherited IRA’s.

6. The charity must be a 501(c)(3) organization. Donations to Sponsoring charities of donor-advised funds, private foundations and supporting organizations do not qualify.

7. You should receive a confirmation letter from the charity acknowledging the donation and retain it with your tax records.

Bob Bloom, CPA provides a boutique tax practice in The Villages and surrounding areas. After having a 35 plus year tax practice of my own, I sold my practice in Seattle and moved to The Villages where I am a licensed CPA. I love doing taxes and am dedicated to my clients. My rates are reasonable, I am professional and prompt. I come to your home to meet with you and discuss your tax needs, no obligation. If you hire me, I do your return and bring it back to you. I deal with complex and out of state tax returns and can represent you to the IRS if needed. Call me at 425 941 5224 seven days a week or email bobbloomCPA@aol.com I have references.

Last edited by Bloom&Company; 01-22-2017 at 06:46 AM.
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Old 01-22-2017, 08:57 AM
Boomer Boomer is offline
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Last edited by Boomer; 02-21-2017 at 07:11 AM.
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tax, ira, income, qcd, charitable

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