More than half of Americans make at least one annual charitable gift to support an organization or cause they are passionate about. While philanthropy is fulfilling on its own, the tax benefits can be rewarding as well. There are several types of charitable giving for philanthropy and tax benefits, including using RMDs for charitable giving.
In the past, claiming your itemized deductions such as charitable giving was fairly effective. However, the government nearly doubled the standard deduction with the 2017 Tax Cuts and Jobs Act. This served as an incentive for taxpayers to not itemize when filing their income taxes.
Itemizing is still great if you donate large sums, but most people are unable to give at a level that’s higher than the standard deduction. However, if you’re 70 ½ or older, making charitable distributions directly from an IRA can be a very tax-effective way to support a cause.
Required Minimum Distributions (RMDs)
Once you reach the age of 72, there is a required minimum distribution (RMD) from your retirement plan. It is the smallest amount you must withdraw from your plan every year. This rule only applies to employer-sponsored plans such as a 401(k) or traditional IRA. If you don’t meet the requirement, the amount not withdrawn is taxed at 50 percent.
Qualified Charitable Distributions (QCDs)
When you remove funds from your retirement plan, they are typically taxed. But, with a qualified charitable distribution (QCD), a check is sent directly from your account to the charity of choice. You are able to contribute up to $100,000 directly to a qualified 501(c)(3) public charity without counting the distribution as taxable income. While using RMDs for charitable giving doesn’t technically provide a charitable deduction for taxpayers, their exclusion from your total annual taxable income may put you in a lower tax bracket.
Using RMDs for Charitable Giving (DAF)
Of course, as with any tax strategy, the rules can be fairly complex. That’s why we always suggest consulting with your tax or financial advisor to understand how to navigate the process in your specific situation. However, here are some of the major ones:
- The retirement account owner must be 70 ½ or older.
- Donations must go directly from your retirement account to the qualified public charity.
- The annual limit QCD limit is $100,000 per account owner.
A second option is to make a tax-deductible contribution to a donor-advised fund (DAF). While this distribution still counts as taxable income, it may provide an attractive way to reach your philanthropic objectives. It has several advantages such as growth potential and flexibility. Both options can be useful during tax season, so please consult your tax or financial advisor for guidance on how to get started.