When you ask people why they give, the answer is almost never “the tax deduction.” However, if Uncle Sam rewards you for being philanthropic, that is a welcome bonus!
We are all familiar with the tax advantages of charitable giving when itemizing deductions. The increase in the standard deduction, though, means that many people who itemized deductions before no longer do so. This eliminates one tax benefit of charitable giving.
If you are older than 70 1/2 and have a traditional IRA, or individual retirement account, an impressive tax break remains for charitable giving, even if you do not itemize deductions. It is accomplished by making a direct gift to charity from your IRA.
Your contributions to a traditional IRA were not taxed when you made them. Instead, they are taxed when withdrawn — at your current tax rate. The wrinkle is that once you turn 72, the government requires you to begin withdrawing from that IRA through a “required minimum distribution.”
Example: Fred is 75 and has a required minimum distribution of $10,000. This will be “taxable income” for the year. Because of Fred’s other income, he will owe income tax on the entire $10,000. In addition, this increase in his income will cause his monthly premiums for Medicare Part B and Part D to go up and result in a portion of his Social Security benefits being taxed.
Fred was hoping to make $5,000 in charitable gifts during the year, but because he does not itemize deductions, there is no tax benefit from doing so — unless he uses his IRA.
Fred instructs his IRA administrator to write checks totaling $5,000 directly from his IRA to his favorite Harpswell charities. Since the distribution to charity completely bypasses him, he never shows that $5,000 as income. It passes completely tax-free. The added bonus in Fred’s case is that his Medicare premiums will not go up and his Social Security will not be taxed.
The benefits of IRA giving vary depending on your personal circumstances. When it comes to taxes, one size definitely does not fit all, so be certain to consult your professional adviser before making decisions.
It is likely that your favorite organizations in Harpswell are “qualifying charities,” usually 501(c)(3) nonprofits, for purposes of this tax benefit. Please support them generously in your year-end giving!
