I read one of your recent columns about making charitable contributions with your minimum required distribution. I have a couple questions that I hope you can help me with. This year, my minimum required distribution is going to be a little over $20,000. Because of a number of different reasons, I have decided to donate the entire amount. My first question is does it have to go to one charity or can you spread it out to a number of different charities? My second question is, if I do it this year, does it have any impact on future years? A friend of mine said that he thinks that if you donate to a charity one year, you have to continue that into the future. I do not know what I want to do in the future.
With regard to donating your minimum required distribution, you can donate that money to as many charities as you choose. The law does not require you to give to just one charity. In addition, you are not required to donate all of your minimum required distribution. You can choose to donate as much or as little as you like.
With regard to whether what you do in 2016 will affect future tax years, the answer is no. What you do in 2016 with your minimum required distribution will have no impact whatsoever on what you do in future years. Therefore, if you choose to donate your minimum required distribution this year, you are under no obligation to do it next year. For this part of the law, every tax year stands on its own.
I am frequently asked about who should take advantage of this provision in the law that allows one to donate their minimum required distribution directly to a charity without tax consequences. First, the individual has to be charitable in nature. For someone who doesn’t make charitable contributions, this provision in the law is probably irrelevant. However, for people who are charitable in nature, and who do make charitable contributions, using this provision can provide a significant tax savings, particularly for people who do not itemize their deductions. For people who are generous in nature and who do not itemize their deductions, when they make a charitable contribution they do not receive a tax deduction. Thus, they are going to pay tax on their minimum required distribution but receive no tax benefit when they make their contribution. By donating all or a portion of their minimum required distribution directly to a charity, they avoid paying tax on that distribution. Not only will this save them on income taxes, but it also could have a positive impact on whether their Social Security benefits are subject to tax and how much they will pay in Medicare premiums.
Like everything else, when it comes to taxes, it is important to dot the I’s and cross the T’s. To do this transaction, the money must be directly transferred from the IRA to the charity. If the money is distributed to you directly, then you cannot take advantage of this provision.
When it comes to taxes, it is important to have a strategy. In some situations, depending upon someone’s financial or tax situation, gifting appreciated securities outside a retirement account may be more beneficial then donating your minimum required distribution. Therefore, a talk with your tax person about which way makes more sense for you is probably appropriate.
With regard to donating your minimum required distribution, the key is that this transaction must be completed by December 31. Remember, IRA custodians get very busy near the end of the year and therefore, you don’t want to wait too long before you request this transaction.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org