Contribute IRA funds to Charity

Certain older taxpayers may be able to benefit from a unique tax break.

Strategy: Transfer funds directly from and IRA to an IRS-approved charity. Although the charitable contribution isn’t deductible, the distribution from the IRA isn’t taxable. And the payout qualifies as a required minimum distribution (RMD).

Congress threatened to remove this tax break as part of Tax Cuts and Jobs Act (TCJA). But, ultimately, the new law didn’t touch it.

Here is the whole story: An individual age 701/2 or older can transfer up to $100,000 a year directly from an IRA to a qualified charitable organization without paying any tax on the IRA distribution. If your spouse has one or more IRAs in his or her own name, he or she has a separate $100,000 allowance.

For these purposes, a qualified charitable distribution is defined as one from either a traditional or Roth IRA that would otherwise be taxable. The distribution must be made directly from the IRA trustee to the charity. Furthermore, the contribution must otherwise qualify as a charitable donation. If the deductible amount decreases because of a benefit received in return (e.g., for a dinner at a fundraising event) or the deduction wouldn’t be allowed due to inadequate substantiation, the exclusion is not available for any part of the IRA distribution.

Under a special rule for charitable donations, the IRS treats distributions from an IRA funded at least partially with nondeductible contributions as coming first from taxable funds and then from nontaxable funds. All of the individual’s IRAs are grouped together for this calculation.

Finally, owners of traditional IRAs are required to begin receiving RMDs in the year after the year in which the owner turns age 701/2. A qualified charitable distribution counts as an RMD. So, you could potentially replace taxable RMDs with tax-free qualified charitable distributions that satisfy your RMD obligation.

Note that the same rules also apply to Roth IRAs. Roth IRA distributions to individuals older than 591/2 are often tax free. But a portion of a distribution may be taxable for a Roth in existence less than five years.

Small Business Tax Strategies
September 2018