Last week we talked about using a donor advised fund to capture tax benefits for charitable contributions under the new tax law. But since not everyone uses a donor advised fund, this week we’ll talk about how to save on taxes when making a charitable donation from your traditional IRA.
If you’re like most taxpayers and don’t itemize deductions, the Internal Revenue Service offers you a great way to make charitable contributions and avoid taxes at the same time if you’re over the age of 70 ½. This provision pre-dates the new tax law.
When you’re over 70 ½, you are required to take a required minimum distribution (RMD) each year from the combined total of your IRA retirement plans. All of the RMD is included in your taxable income.
But you can transfer up to $100,000 a year from your IRA to a charity (or to several charities). The amount you give to charity is not taxable—and the gift counts toward satisfying your RMD.
In essence, the amount of the RMD that you send to charity never hits your gross income. So even if you use the standard deduction, you will end up saving on taxes by steering some or all of your RMD to charity.
There are a few rules you need to keep in mind. For example, you can’t take out the gift money yourself and then give it to charity—you have to transfer it directly from your IRA. You can’t route it through a donor advised fund, either.
To learn more about the ins and outs, check out this useful primer from U.S. News & World Report on donating your required minimum distribution to charity.