How to use a Required Minimum Distribution to Support Charitable Causes
In 2015, the law that allowed taxpayers to make as much as a $100,000 donation from their IRA was made permanent. There are still limitations—you’ll need to be 70 ½ or older—but as long as you meet all the requirements, you can transfer your Required Minimum Distribution for 2016 to your favorite charity at any point during the year.
The donation counts as your RMD but does not increase your adjusted gross income, according to Kiplinger’s article “Donate Your RMD Tax-Free to Charity in 2016.” That can be helpful if you don’t itemize and can’t deduct charitable contributions. In addition, keeping some or all of your RMD out of your adjusted gross income might help you avoid the Medicare high-income surcharge or help make less of your Social Security benefits taxable.
Here’s another important requirement: the RMD must be transferred directly from the IRA to the charity to be tax-free. However, if you withdraw it from the IRA first and then give it to the charity, you get to deduct the gift as a charitable contribution (if you itemize), but the withdrawal is included in your AGI.
Now that this law is permanent, IRA administrators have begun to simplify the process. As an example, Fidelity will soon introduce a new form to make it easy to transfer the money and clearly state your wishes to the charity. If your IRA has check-writing privileges, you can write the check directly from your account to the charity. Otherwise, the IRA administrator will write the check and send it directly to the charity. However, the charity may not receive clear instructions as far as who it’s from or where the money should be directed.
If your IRA administrator doesn’t allow check writing but will transfer money directly to the charity, contact the charity ahead of time and let it know a check will be coming from your IRA. The charity sends you a receipt for your taxes. You can instruct the charity as to which fund or program you’re supporting. One last note: you can make the tax-free transfer from the IRA to a charity but not to a donor-advised fund.
Getting tax benefits while supporting causes is a nice win-win for everyone. To make sure that you are making the most of your donation, it is recommended that you speak with an estate planning attorney to review how charitable giving fits in to your entire estate plan. There are other methods that can be used to minimize taxes while building your legacy.
Reference: Kiplinger (May 13, 2016) “Donate Your RMD Tax-Free to Charity in 2016”