How to Make your Charitable Dollars Work Again
By Matt Ward, CFP®
Are you charitably inclined? The Tax Cuts and Jobs Act of 2017 increased the Standard Deduction for Taxpayers making it much more difficult to itemize now. This means for those of us who give to charity, we might not be receiving a tax deduction anymore.
Did you know, once we turn 70 ½, we can donate Qualified Charitable Distributions (QCD) from our Traditional IRAs? QCDs can be used to satisfy our Required Minimum Distributions from the IRAs, and we can donate above our RMD amount as well, if we would like.
Rather than donating from checking accounts, or donating our belongings, which require us to itemize to receive the tax deduction, if we instead donate from our IRAs, the distributions are tax-free. You must be over 70 ½ and the IRAs must be Traditional to receive the tax break. If you donate $6,000 and are in the 20% tax bracket, normally you would pay tax of $1,200. But when taking a Qualified Charitable Distribution from your IRA, you would receive the $1,200 tax-free, thus paying $0 in tax, and all $6,000 goes to charity. You would not be entitled to receive this deduction if you donate from a checking account and if you do not itemize.
Therefore, if you are over 70 ½, charitably inclined, do not itemize deductions, and want to receive a tax break, then donating from IRAs is a very effective tool.
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*The maximum amount one can contribute as a QCD is $100,000 per year, per taxpayer. *In 2021, due to the response to COVID-19, taxpayers claiming the standard deduction can contribute up to $300 from non-IRAs and get a deduction ($600 married filing jointly) and receive a deduction.