When Donating to Charity From an IRA, Beware of These Tax Traps
Using your individual retirement account to give to charity is a good thing. But tax snafus can ruin the good intentions. Traditional IRAs have long been used to make qualified charitable distributions. Eligible individuals can donate as much as $100,000 a year. Such gifts can make up part or all of the donor’s required minimum distribution, or RMD. And amounts donated to qualified charities are excluded from the donor’s taxable income for that year. For example, if your RMD this year is $10,000 and you are charitably inclined, you can give $5,000 of this amount to your favorite qualified charity. Instead of having to report a $10,000 distribution as income to the IRS, only $5,000 will be taxed according to your income bracket. However, there are some little-known nuances with qualified charitable distributions to be aware of.
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No quid pro quo
One mistake is making a gift to a donor-advised fund, private foundation or charitable-gift annuity. To obtain the tax benefit, there must be a full release of the funds directly to a charity. Another mistake is when the donor accepts something in return for their gift. It’s obvious that you can’t receive a college scholarship for your grandchild as a quid pro quo. But you can’t even accept a tote bag, coffee mug or T-shirt as a token “thank you.” Nor can you take a deduction for such a gift. Since you’re already reducing your taxable income by subtracting the gift from your required minimum distribution, the IRS would consider the additional deduction to be “double dipping.”
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Although the Secure Act raised to 72 the age at which RMDs begin, the eligible age for making qualified charitable distributions still starts at age 70½ (and you must actually be 70½, not turning 70½ later that year). So if you are charitably disposed and 70½, you can make the gift even before the RMD is to begin.
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The custodian of your IRA—a bank, brokerage firm or mutual-fund company—will typically have a charitable-distribution form or process that you must follow. Custodians usually send the money directly to the charity. However, checks can also be made payable to the charity and sent to the account owner for delivery to the organization. When you receive a Form 1099-R from the custodian showing the distribution, there is no special coding indicating that it was a qualified charitable distribution. Therefore, it is your responsibility to inform the IRS about it on your federal tax return.
Similar to how a rollover is reported on Form 1040, you would list the full distribution on line 4a. On line 4b, where you report your taxable IRA distributions, if the total amount was used for qualified charitable distributions, you would enter zero; if only part was used for charity, you would enter the remainder as the taxable amount. Next to line 4b or in a dropdown box if filing electronically, you would then label the amount of the qualified charitable distributions.
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https://www.wsj.com/articles/ira-charity-donation-taxes-11656694166 (subscription)