First Church is blessed with many wise individuals and one such gentleman approached me recently with an excellent question. Do we remind those members, 70½ and above, how First Church can benefit from their Qualified Charitable Distributions and Required Minimum Distributions?
Consider this a reminder. 😊
The “Tax Cuts and Jobs Act” passed in December 2017 makes donations from IRAs directly to a charity an even more strategic way to give money. Why? Because the Act nearly doubled everyone’s standard deduction beginning in 2018. The “standard deduction” is the amount all taxpayers can deduct from their taxable income instead of itemizing deductions. The percent of taxpayers itemizing deductions dropped from 30% in 2017 to approximately 10% beginning in 2018. What this means for many seniors age 70½ or older is that the only way to reduce their tax bill is to make charitable donations directly from their Traditional or Roth IRA, known as a Qualified Charitable Distribution (aka QCD).
And, while reducing taxes is not the primary reason for making charitable gifts, giving smartly enables us to give more or have more left over.
If you are age 72 or older and have money in an IRA or another qualified retirement plan, you must withdraw a Required Minimum Distribution (aka RMD) annually, and the amount withdrawn is subject to tax. A QCD may satisfy the individual’s RMD, and up to $100,000 of QCDs may be excluded from one’s taxable income. The RMD must be transferred by an annual deadline which is usually December 31st. If you don’t withdraw your RMD, the IRS can assess a 50% penalty.
Please note that you can direct your IRA custodian to pay all or a part of the required distribution directly to FUMCFW and/or other qualified charities and avoid paying taxes on the distribution while still utilizing the increased standard deduction. These direct roll-over distributions count toward your RMD. (If your retirement funds are in another type of retirement account, such as a 401(k), you must first transfer the funds to an IRA, and that must be done prior to the year of your QCD.) So, a senior can utilize the higher standard deduction while still excluding their RMD from taxable income.
Excluding the RMD from taxable income can save taxes in other ways also. It may …
• Reduce the amount deducted from your monthly social security for Medicare
• Reduce or eliminate the amount of taxes paid on your social security income, and/or
• Reduce or eliminate the 3.8% Medicare surtax levied on other income.
And, even if itemizing deductions is still advantageous, subtracting a RMD from one’s income may…
• Increase deductions for medical expenses, and/or
• Avoid the annual limit on deductible charitable donations.
Whether or not these tax savings are available to you depends on your individual tax situation, and there are a few instances in which this way of donating does not save more tax. For that reason, we strongly advise you to consult directly with your personal financial, tax and/or legal advisors to determine the best way for you to proceed.
First Church appreciates the many current members who are giving to the church through their IRA. If you have any other questions, please feel free to contact Steve Fagan or me.
Director of Stewardship