Donate Your IRA Required Minimum Distribution to Charity, Tax Free

Even though a direct distribution from an IRA to a charity is not included in the taxpayer’s gross income, it is taken into account in determining the taxpayer’s required minimum distribution (RMD) for the year.

Late In 2015, Congress made permanent a tax law that allows a taxpayer age 70.5 or older to take an up-to-$100,000 annual gross income exclusion for otherwise taxable IRA distributions. The IRA distribution must be made directly to an eligible charitable organization.

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These distributions are not subject to the charitable contribution percentage limits and are not includible in gross income. Since the distributions are not included in gross income, it will not increase adjusted gross income (AGI) for purposes of the phase-out of any deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain levels. Having a lower adjusted gross income may also mean less tax may be paid on Social Security benefits, and Medicare B and D premiums may be lower.

Even though a direct distribution from an IRA to a charity is not included in the taxpayer’s gross income, it is taken into account in determining the taxpayer’s required minimum distribution (RMD) for the year. To constitute a qualified charitable distribution, the distribution must be made after the IRA owner reaches age 70.5 and it must be made directly by the IRA trustee to a qualified charitable organization. Also, to be excludable from gross income, the distribution must otherwise be entirely deductible as a charitable contribution deduction.

Amounts transferred are not taxable, but no deduction is available for the amount given to charity. As shown below, making direct contributions under this provision will save more taxes than taking an IRA distribution and making a contribution from the proceeds.

For Example: John, who is age 73, is the owner of a traditional IRA with a balance of $300,000, consisting solely of deductible contributions and earnings. He wants to make a contribution of $100,000 to his college before the end of 2016 to mark the 50th anniversary of his graduation. John, who is a widower and files his tax return as a single taxpayer, expects to have AGI of $110,000 in 2016, itemized deductions of $25,900 (before taking the $100,000 contribution to his college into account), and a personal exemption of $4,050 in computing his taxable income. The itemized deductions of $25,900 include $20,000 of other contributions to public charities.

If John takes a distribution of $100,000 from his IRA, his AGI for 2016 will be increased to $210,000. If he then contributes the $100,000 to his college, it will only increase his total charitable deduction by $85,000 ($105,000 [1/2 of AGI of $210,000] less the $20,000 of other charitable contributions he has made). His itemized deductions will be $110,900 ($25,900 plus $85,000), and his taxable income will be $95,050 (AGI of $210,000 less itemized deductions of $110,900, and less personal exemption of $4,050). Jason’s income tax for 2016 will be $19,658.

If instead, John had the Trustee of his IRA transfer the $100,000 directly to his college, his AGI would not increase and he would not be entitled to a charitable contribution deduction for the amount transferred from the IRA. His AGI would remain at $110,000, his taxable income would be $80,050 ($110,000 less itemized deductions of $25,900, and less his personal exemption of $4,050), and his income tax for 2016 would be $15,790 or $3,868 less than under the scenario where he takes a distribution of $100,000 from his IRA and then contributes it to his college. Tax savings are even more if John is subject to a state income tax.

Consult your tax advisor to see if this is a good opportunity for you.

Kristi Harris is a Principal at Fluence, a dental CPA and Consulting firm that represents more than 200 dentists, located in Portland, Ore. Kristi is a member of the Academy of Dental CPAs, which is an organization that represents over 9,000 dentists.

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