In this blog post, we would like to cover a rule recently passed by Congress that allows an individual to gift their required minimum distribution (RMD) directly to a charity as a tax-free distribution.
As many of you know, the IRS has a rule requiring retirement account holders to start taking money out of their accounts the year in which they turn 70 ½. These are called required minimum distributions (RMD). The purpose, of course, being that the government wants their tax money on the amounts people were able to put away in retirement accounts on a pre-tax basis.
The amount of the RMD, which is calculated from life expectancy tables every year, is considered taxable income. In some cases, clients do not need the cash and would rather not have more taxable income. Increasing taxable income above certain levels can affect Medicare premiums, Social Security retirement benefit taxation and various credit/deduction phaseouts. So, for these clients, who also have charitable inclinations, gifting RMDs directly to charities can make a lot of sense.
Here is more information from the IRS’s website:
Qualified charitable distributions
What is a qualified charitable distribution?
Generally, a qualified charitable distribution is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity. See Pub. 590-B, Distributions from Individual Retirement Arrangements (IRAs)) for additional information.
Can a qualified charitable distribution satisfy my required minimum distribution from an IRA?
Yes, your qualified charitable distributions can satisfy all or part the amount of your required minimum distribution from your IRA. For example, if your 2014 required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution for 2014, you would have had to withdraw another $5,000 to satisfy your 2014 required minimum distribution.
How are qualified charitable distributions reported on Form 1099-R?
Charitable distributions are reported on Form 1099-R for the calendar year the distribution is made.
How do I report a qualified charitable distribution on my income tax return?
To report a qualified charitable distribution on your Form 1040 tax return, you generally report the full amount of the charitable distribution on the line for IRA distributions. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution. Enter “QCD” next to this line. See the Form 1040 instructions for additional information.
You must also file Form 8606, Nondeductible IRAs, if:
- you made the qualified charitable distribution from a traditional IRA in which you had basis and received a distribution from the IRA during the same year, other than the qualified charitable distribution; or
- the qualified charitable distribution was made from a Roth IRA.
This strategy can be a valuable wealth management tool in reducing taxable income while helping out a cause you feel strongly about. If you have any questions about this or any other financial planning topic, don’t hesitate to reach out.
Mike Gallagher, Director of Investments