Dear Rick:
I was approached about funding a multi-year project through my church. My commitment is for five years and the church told me that by using my IRA I wouldn’t have to pay any taxes. I went to my bank where my IRA is located to get the forms and they told me that the money would be reported to the IRS. I was confused so I went to the gentleman who helps me do my taxes. He told me that he just does tax returns and doesn’t give tax advice. I was hoping that you can tell me who is right; my church or the bank?

Thank you.
Marlene

Dear Marlene:
As crazy as it may sound, both the church and the bank can be right. The key is your age and the amount of the yearly contribution.

According to our tax law, if someone is 70½ years of age they are required by law to begin taking distributions from their retirement account. When that money is distributed it is taxed to the individual at their ordinary income tax bracket. However, like all tax laws there generally is an exception to the rule and there is one when it comes to required minimum distributions.

For taxpayers that are 70½ or older, and thus are required to take distributions from their IRA, the one exception to the rule of paying taxes is if you donate all or a portion of that required minimum distribution to a qualified charity. To qualify, the money must be distributed directly from the IRA custodian to the qualified charity. Therefore, in the case at hand, if you are 70½ or older and the distribution to the church is less than $100,000 per year, then the church is correct that you will not be taxed on that distribution. However, at the same time, the bank is correct that the transaction will be reported to the IRS. That being said, just because the transaction is reported to the IRS does not mean there are any taxes owed. It’s similar to when you sell your home. The title company reports the transaction to the IRS and you have to report the transaction on your tax return; however, that doesn’t mean you’ll owe any taxes. Therefore, if you are 70½ or older and the yearly amount of the contribution is $100,000 or less, you would not owe any taxes on the amount coming out of your IRA. On the other hand, if you are under 70½, even though the money is going to your church, you would have to pay taxes on the distribution. Furthermore, if you are 70½ or older and the distribution to the church is greater than $100,000, the difference between the two is taxable income to you as ordinary income.

The strategy of donating required minimum distributions directly to a charity has been part of our law for a number of years now. Our new tax law did not make any changes to this part of the law. However, because under the new tax law the standard deduction has doubled, and as a result more taxpayers will be taking the standard deduction as opposed to itemizing their deductions, the strategy can be a very good one for those taxpayers who are over 70½ and are charitable in nature.

Making charitable contributions and helping those less fortunate to us is an American tradition. However, doing some planning with regard to your charitable contributions, if done right, can not only help those less fortunate and in need, but can also save you a few dollars in taxes and saving on taxes is another American tradition.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.