The Pension Protection Act (PPA) of 2006 introduced a little-used tax trick – you are allowed to donate money directly from your IRA and have it count as part of (or all of) your Required Minimum Distribution (RMD). You must be 70-1/2 or older, and the limit is $100K. Who does this benefit? For starters, only those who are taking RMDs, about 9% of the population. Next, it really will just help those who don’t itemize, after all, if you itemize, a charitable donation is a deduction added to your schedule A itemized deductions. Last you have to want to donate to charity anyway. You see, donating $1000 to save $250 in taxes makes little sense. But if you planned the donation anyway, this will save you some tax in the process.
I started by discussing PPA, passed in 2006, so why do I bring this up now? The rule allowing the donation from your IRA had expired in 2009. It was only the Tax Hike Prevention Act passed in December 2010 that revived this opportunity. Since it was passed so late in the year, you have until January 31 to make that donation and have it count for 2010.
Joe
Nice catch. I’d written about the effect of social security being taxed but never combined it with this. Excellent point. Thanks!
Donating your RMD to charity can be beneficial even if you do itemize your deductions, since the donated RMD will not count toward your AGI, which might keep you from having to pay taxes on your Social Security income, and would also reduce the amount needed to reach the 7.5% of AGI for medical cost deductions.
If I reduce my AGI by donating part of the RMD, can I count the amount donated as part of my itemized deductions? Probably not.
No, Doug, sorry. This benefits those who don’t itemize more than other groups. No double dipping.
Question: Does the money have to be direct from IRA to charity through a direct fund transfer? Or, can I claim that checks I wrote after receiving IRA distribution came from the distribution?
David – yes, it needs to go directly from the IRA to the charity. The custodian may send you the paper check, made payable to the charity. You cannot write your own check and have it count as a QCD. Thanks for the visit and question!