Some good news: Tax reform makes “qualified charitable deductions” even more valuable than ever in 2018.
You may be one of many taxpayers taking the standard deduction under the new tax law. That eliminates your tax deduction for charitable gifts because you may not itemize. A qualified charitable deduction is a way to remedy this, by giving you a tax break for your 2018 charitable contributions, notes Sarah Brenner, IRA analyst with Ed Slott’s IRAHelp.com.
If you are 70½ or older, it’s worth considering a last-minute qualified charitable deduction (QCD), under which you sell stock, shares, or transfer cash from your IRA to a charity.
Best part: You can even satisfy your RMD, or required minimum distribution, from your retirement account, and transfer that money directly to the charity. Taxpayers age 70½ or older are required to take RMDs every year. So, you can effectively replace taxable RMDs with tax-free transfers to charity.
A broker or your accountant should be able to help, and you may be able to make your contribution online. But time is of the essence — you must complete a funds transfer by Dec. 31.
You can transfer funds directly from an IRA to charity. Although the contribution isn’t deductible, it’s not subject to income tax. To qualify, the distribution must go directly from the IRA trustee to the charity. In other words, the funds cannot pass through your hands on the way to the charity, according to Isdaner & Co. CPAs in Bala Cynwyd.
The maximum amount you can transfer each year is $100,000. If your spouse has one or more IRAs set up in his or her own name and is also at least 70½ years old, your spouse is entitled to a separate $100,000 annual donation.
Why do this? You may be able to avoid taxes if you’re drawing from a traditional IRA. A qualified charitable distribution is not subject to ordinary federal income taxes. The amount is simply excluded from your taxable income.
When can you do this? You must be at least 70½ at the time of the distribution.
How? Confirm that the receiving charity is qualified and legitimate (more on that below). Again, you can make a maximum of $100,000 per year in qualified charitable distributions.
Also, ask the lucky charity for a letter confirming your donation and that it came from your IRA.
Some rules: You cannot receive anything in return for the donation. No free tickets, tote bags, or mugs allowed. Gifts to donor advised funds or private foundations do not qualify as a QCD, Brenner, the IRA expert, noted.
Finally, she added, the 2018 Form 1099-R that your IRA custodian will send to you will not have any information indicating that a QCD has been done for the year. “That means that it could easily be missed by your tax preparer. Avoid this mistake by being sure your tax preparer is aware of the transaction," she recommended.
Tips for choosing a charity
Does the organization have a clear mission statement? Look for specificity, according to Foundation Source. Vague and ambiguous intent (“dedicated to making the world a better place”) often equals vague, ineﬀective action.
Are the nonprofit’s values congruent with your own? Let’s say you’re considering a donation to a nonprofit dedicated to reducing urban violence. A closer look reveals the nonprofit supports tougher gun-control laws. Depending on whether you agree, the nonprofit may or may not be the right fit.
Is it the only nonprofit addressing this need? Are the organization’s services and programs unique, or are others doing similar work?
If there are multiple organizations working in the same sphere, what makes this one especially worthy of support? To compare nonprofits with a similar focus, many donors visit “watchdog” rating websites such as Charity Navigator (www.charitynavigator.org) or GuideStar.org.
Check online with the IRS regarding the validity of a charity. Here’s a link to the IRS’s Tax Exempt Organization Search, which helps find legitimate, qualified charities: www.irs.gov/charities-non-profits.
Has the organization been tainted by controversy? Do some online research to see if the nonprofit’s name has been in the news. A bad reputation in the nonproﬁt world, whether or not it’s deserved, can undermine an organization’s eﬀectiveness.
“Learn everything you can about how nonprofit organizations approach their work, fund their efforts, and measure their results,” says Page Snow, chief philanthropic officer of Foundation Source.