Making a Tax Free IRA Deduction to Charity

Over the past several years, Congress has flip-flopped on legislation that allows individuals age 70 ½ to receive a tax break for charitable contributions from individual retirement accounts. The provision, known as the qualified charitable distribution (QCD) rule, makes it possible to satisfy annual minimum distribution requirements, support charitable causes, and receive a tax break all at the same time. On May 30, 2014, legislation to make the tax break permanent passed the House Ways and Means Committee. This is one of several tax extenders that will be sent as stand-alone bills for votes on the House floor in November, 2014. With the likelihood that this advantageous tax break will be extended, taxpayers may want to continue directing IRA distributions directly to charities as they have done in the past.

Per federal RMD requirements, as a traditional IRA owner age 70 ½ or older, you must make a minimum withdrawal each year in order to avoid a stiff IRS penalty. Under the QCD rule, beginning at age 70 ½, you can elect to have all or part of your RMD transferred directly to qualified charities (up to $100,000 per taxpayer, per year). Unlike conventional distributions, QCDs aren’t subject to ordinary federal income tax (i.e. they are tax free).

Although the QCD provision expired on January 1, 2014, it is very important for applicable taxpayers to continue considering the provision now, as part of their 2014 tax planning strategy, as it will likely be re-authorized and made permanent through ongoing tax extender legislation.

While the QCD provision may appear to be most beneficial for wealthy individuals with significant IRA balances, it’s actually more advantageous for lower income taxpayers. Why? Because RMDs often increase taxable social security income. As an example, a conventional $5,000 RMD withdrawal may increase a taxpayer’s income by $7,500. In addition, the extra RMD income may affect the taxpayer’s ability to qualify for the Nebraska Homestead Exemption. At HBE, we have seen instances where the marginal tax rate on RMDs, after taking into account social security taxation, reduction of medical expense deductions, and increased real estate taxes due to Homestead Exemption exclusion, can be as high as 60%.

HBE has a team of experts who can help you fully understand the best approach for fulfilling your annual RMD requirements, whether you have charitable intent or not. Give us a call at (402) 423-4343 and we’d be glad to speak with you.

Jimmy Schulz

By Jimmy Schulz, CPA, CVA, Partner

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