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More Bang for the Buck with Charitable Contributions from an IRA – the Qualified Charitable Distribution

by James Wood

Are you 70 ½ or older?  Do you have an IRA?  IF SO, read on:

What motivates us to give to charities?  The answer to that question is different for everyone, I suppose.  In my case, my wife and I generally look to where we think our donations can get the most bang for the buck — does the charity really need our help?  — are our dollars going to be well spent?  — what aspects of the charity earn our long-term loyalty, or cry out for some short-term support?  While our primary motivation has little to do with any tax benefits that might accrue to us, we look at the tax benefits as a way to maximize what we can afford to give away.  In this light, I wanted to share with a subset of our wonderful Friendship Bridge donors an idea that might be appealing.  As you might already know, provisions in the recent tax law change created a relatively simple way for many donors to make charitable contributions on a more “tax-efficient” basis, through something known as a “qualified charitable distribution,” or “QCD.”

If you are 70 ½ or older and have an IRA, you can make a charitable contribution directly from your IRA to a 501(c)(3) tax-exempt entity such as Friendship Bridge, and the contribution will count as part of your “minimum required distribution” for the year in which the contribution is made.  This may have some big benefits if you fall within a “sweet spot” under the new tax law.  (QCDs are limited to $100,000 each year.)

Normally, most or all of the required minimum distributions that you receive from your IRA will be taxable to you, but if you make a QCD, then the amount of the charitable contribution, if made directly from your IRA, will not be included in your adjusted gross income but will count as part of your minimum required distribution.  The kicker is that you can still use the new, more generous personal exemption of $24,400 for joint filers ($12,200 if filing singly), and the extra standard deduction for the aged and blind of $1,300 each for joint filers ($1,650 if filing singly) – these are all 2019 amounts.  For many of us older donors, this may fit us to a T.  Like us, maybe you’ve paid off your home mortgage by this time in your life, so you aren’t generating a lot of mortgage interest deductions.  And maybe it’s going to make more sense for you to use the increased personal exemptions instead of itemizing your deductions; this is especially true now since the deduction for real property taxes and state income taxes has been capped at $10,000.   If you happen to be in the same boat as my wife and I are in, you are going to want to stop itemizing and instead will use the personal exemptions and standard deductions.  But by using some of your minimum required distributions from an IRA to make your charitable contributions with a QCD, you effectively are getting a charitable deduction AND the benefit of the higher personal exemptions.

To boil all of this down, if you are 70 ½ or older and you have an IRA, you really ought to look into this.  Your attorney, tax accountant, or investment advisor can give you advice on how to do this and whether it makes sense for you.  It’s not complicated at all.  But it takes a little bit of planning, so don’t wait until the last minute!

 

James joined the Board of Friendship Bridge in 2011 and is now Co-Chair of the Board. He was a business law attorney at Sherman & Howard in Denver for over 42 years.  James received his B.A. from the University of Texas at Austin and his J.D. from Yale Law School. He first became interested in Friendship Bridge when he helped develop an experiential learning program at the school where his children attended; students took school-sponsored trips to Guatemala and learned about Friendship Bridge. For several years, James provided pro bono legal services in connection with borrowings by Friendship Bridge and various corporate and contract matters. His wife (Felicity Hannay) was a board member from 2006 to 2012.