When donating to charity, investors may want to explore this IRA strategy

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 11/20/19

When donating to charity, investors may want to explore this IRA strategy

Taxpayers may have overlooked a charitable giving strategy unique to individual retirement accounts (IRAs), until now.

Since the Tax Cuts and Jobs Act (TCJA) set new limits on itemizing deductions, many taxpayers had to decide whether to claim charitable donations.

The number of taxpayers choosing to itemize deductions fell to 13% following the 2018 implementation of the TCJA, from 30% in the previous year (Tax Policy Center).

While taking the standard deduction may make sense for an individual’s tax plan, these taxpayers will not be able to receive a tax deduction for charitable donations without itemizing.

Since tax reform took effect, the IRS reported that taxpayers itemized roughly $57 billion less in charitable contributions year over year through July 25, 2019.

A provision unique to individual retirement accounts (IRAs) may present an alternative.

Individuals over the age of 70½ who are taking the standard deduction, may want to consider using assets from an IRA account to donate to charity and receive a tax advantage.

Investors are required to take required minimum distributions (RMDs) from their retirement accounts after age 70½. Yet many wealthy retirees find they do not need an RMD to pay for daily expenses. In a 2018 study, 80% of retirees polled said they do not need the money from RMDs for living expenses.

Other benefits for using an IRA for charitable gifts

  • Charitable deductions are limited by a taxpayer’s income — generally up to a maximum of 60% of modified adjusted gross income. Investors directing their IRA distributions to a charity can avoid this restriction.
  • If reporting additional income on the Form 1040 increases Medicare Part B premiums or negatively affects the taxability of Social Security benefits, then making a charitable contribution from an IRA may be appropriate.
  • Some states do not allow residents to deduct a charitable contribution. Making a donation to a charity directly from an IRA may provide a way to effectively claim a state tax deduction. Investors should consult a tax professional for state-specific guidance.

Consult an advisor

Since tax reform, the number of distributions directing IRA assets directly to charity increased 74%, according to recent report.

Investors considering itemizing charitable donations or using the IRA charitable strategy should meet with a financial advisor or tax expert before taking action. In addition, read Putnam's investor education piece, "Donating IRA assets to charity," for more information.

319413