Can you take advantage?
One of the temporary tax provisions made permanent as part of the tax code in late 2015 is qualified charitable distributions from IRAs for those who have reached age 70½. Unfortunately in 2014 and 2015, the law was extended too late during the calendar year to reasonably use this tax law. In 2016 you have the ability to make a planned decision to use this tax benefit. Here is what you need to know.
The rule. For those age 70½ or older, you can have up to $100,000 of your IRA paid directly to qualified tax-exempt charities each year. These pre-tax funds are not subject to income tax by the federal government. This makes the contribution income tax free. No itemized deduction for your contributions is available on these direct transfers.
- Taxpayers do not have the contributions from their retirement accounts added to their Adjusted Gross Income. So as a planning tool, this donation strategy can keep Adjusted Gross Income low. This can help avoid things that come with higher income levels like different Medicare premiums.
- The contribution counts towards a taxpayer’s annual Required Minimum Distribution. If a taxpayer does not need the income and does not want to be subject to required minimum distribution penalties, this can be a great alternative.
- The contribution is a straight write off. Remember, these funds are sitting in your IRA in pre-tax status. When they are normally withdrawn, the funds are subject to income tax. This tax feature allows you the charitable deduction without the hassle of itemizing your deductions.
As with all tax laws, you must be aware of the rules. Foremost among them are;
- The contribution must be made directly between your account and the charity.
- This benefit is on the federal level. The tax treatment in your home state will vary.
- Since the donation does not go through the taxpayer’s income, the donation is not subject to the percentage of income limits on charitable giving by type of organization.
- Don’t wait. Since it usually takes time to initiate and complete this transfer, do not wait until the end of the year to make your direct contribution. The money must be at the charity prior to January 1st.
While this tax opportunity is not right for everyone, it is a new tool to use when creating your annual tax plan.