EDITOR’S NOTE: Please note that the advice offered in this article from the Tennessee Baptist Foundation is not intended to be construed as tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice for the reader. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
By Chris Kelly
Executive vice president, Tennessee Baptist Foundation
As we begin 2019, those persons who own an Individual Retirement Account (IRA) and have also reached age 70-and-half will begin getting notices from their IRA providers about their Required Minimum Distribution (RMD) for 2019. The RMD is the amount (calculated on the owner’s life expectancy) that the IRA owner must take out in 2019 in order to avoid a significant tax penalty of 50% of the RMD amount.
Why does the RMD exist? It’s the government’s attempt to recover some of the tax deferral that the owner has enjoyed over the years since any distribution from an IRA is taxable to the owner in the year of distribution.
However, if you are an individual with an IRA, are 70-and-half, and have charitable inclinations, you actually have an option available to you that will save you taxes for 2019, as follows. The IRS allows your IRA provider to pay your RMD directly to a qualified charitable organization (like your church or other Baptist cause).
If you elect to do this, the distribution paid to the charity is completely non-taxable to you, meaning you do not have to include it with the rest of your income for the year. Furthermore, the amount paid to the charitable organization is credited towards your RMD requirement for the year.
Chris Kelly
For example, Bank of Galilee notifies John T. Baptist that he must take $10,000 from his IRA in 2019 in order to satisfy his RMD. John is in the 22% income tax bracket, and he already knows that he will give at least this much to his church in 2019.
Rather than taking the distribution, paying taxes on the distribution, and then writing a check to the church out of the remaining amount, John can direct the bank to send $10,000 from his IRA directly to the church. By doing so, John saves taxes ($2,200), satisfies the RMD requirements, and supports the Kingdom work of his church with the contribution. The only party left out is the government (this is usually acceptable to most donors!).
This tax-savings technique has become even more important in recent years due to the higher standard income tax deduction.
While the higher standard deduction is better for the vast majority of Americans, it reduces and even eliminates the possible tax benefits of giving to a charity since the amount given to charities (along with other deductible items) must exceed the standard deduction in order to produce a tax benefit to the donor.
The standard deduction is even higher for persons over 65 years of age ($13,600 for individuals, $26,600 for couples), so the amount to exceed before itemizing your deductions is even greater for seniors. Thus, the QCD is even more valuable for those who can utilize it.
The Qualified Charitable Distribution does not have to be aggregated with other deductions before you receive a tax benefit. It is a stand-alone, dollar-for-dollar reduction in your taxable income.
Even if you are not able to itemize your taxes (meaning you have deductions in excess of the standard deduction), you still can take advantage of the tax savings in reduced income taxes created by a QCD.
The QCD may have even greater benefits beyond taxes for you as you will be keeping your reported income lower (remember, you do not include the QCD in your income calculation for the year) which might further lower your Medicare premiums for Parts B and D that are based on household income.
As with any government tax strategy, there are rules to follow. You can only distribute $100,000 from the IRA to qualify for QCD treatment.
You must have an accompanying receipt from the charitable organization to prove it received the distribution. And the distribution must be made directly to the charity to qualify (either the IRA provider sends the check directly to the charity or they make the check payable to the charity and give it to the donor for delivery).
Please note, too, that you cannot make an RMD from all types of IRAs nor from other retirement plans, but your financial advisor will be able to advise you as to your eligibility.
With most of 2019 still before us, it is a great time to look at your RMD amount for this year. If you know you are going to be making contributions to your church or other charity, then it is worth a conversation with your financial advisor.
This time next year, when you are looking at your 2019 income taxes, you will be glad you did. B&R
