Tax-free IRA donations are Smart!
Give and Grin. If you are age 70½ (70.5) or older you can donate from your IRA directly to the qualified organization (see below) of your choice — tax-free! This special IRA donation rule allows you to give up to $100,000 in a calendar year. We call this the “Grin and Give Rule.”
Normally, when you take money out of your IRA, that money is taxable income to you. That’s fine, you say, you’ll just turn around and spend the money on your mortgage or give it to a charity — and get an offsetting deduction. But you might not get all or part of that deduction if, for example, you use the standard deduction or you itemize and your deductions get caught up in the phase-out rules.
Under the Grin and Give Rule, the money taken from the IRA is not taxable income to you.
- And you don’t have to worry about whether you use the standard deduction, itemize or face other deduction limits.
- Actually, if you were going to make a charitable deduction anyway, using the Grin and Give Rule could help you protect your other itemized deductions, and even save taxes on your social security.
- And, of course, the charity doesn’t have to pay any tax either.
In other words, turning your IRA distribution into an IRA donation makes your IRA distribution tax-free!
The maximum annual total using the rule is $100,000. And the gifts count against your required minimum distribution.
Reminder, you have to be dealing with a Qualified Organization (one that is eligible to accept tax-deductible charitable contributions). And not all otherwise Qualified Organizations are eligible (for example, donor-advised funds and supporting organizations are not). CharityCheck101.org can tell you whether a charity is a Qualified Organization.
More Details: The gift must be made directly from your IRA trustee to the charity. Be sure to obtain a written receipt from the charity to substantiate your donation. The Rule applies to many charities, but not all. This is a Federal income tax law; check whether the your state’s income tax laws have been conformed to include the extension. Consult your tax advisor. Don’t give away money you may need.
More background for you
The IRS refers to these distributions as Qualified Charitable Distributions. Here’s a bit of what IRS Publication 590-B has to say.
Qualified charitable distributions. A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax deductible contributions. You must be at least age 70½ when the distribution was made. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for charitable contribution. See Records To Keep in Pub. 526.
The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.
A QCD will count towards your required minimum distribution, discussed earlier.