Many working Americans have contributed to tax-deferred 401(k)s and IRAs for decades. These retirement accounts provide income once they can no longer work. While these accounts grow interest-free, you must pay income tax on any money you withdraw during retirement.
Annual withdrawals from traditional IRAs are required after the age of 70 ½. If you fail to withdraw a minimum amount each year, you must pay a penalty of 50 percent of the amount that should have been withdrawn.
But what happens if you do not need your IRA distributions for living expenses? How can you avoid these penalties and paying income tax on your withdrawal?
The answer lies in charitable giving.
When you pay a distribution directly to a qualifying charity, you can avoid paying income tax on that amount. This is known as a qualified charitable distribution. You must meet certain requirements when setting up an IRA qualified charitable distribution.
To learn more about these requirements, it is important to speak to an experienced Northern Virginia estate planning attorney.
Meet the Qualified Charitable Distribution Requirements
In order to make a tax-free charitable distribution, you must meet specific criteria.
- Age – You must be over the age of 70 ½. If you make the age requirement, you can transfer up to $100,000 per year from your IRA directly to charity without having to pay income tax on this money.
- Married – If you are married, your spouse can also make a charitable contribution of up to $100,000. This means that you can exclude up to $200,000 of your retirement savings by donating it directly to charity.
- Time – You must make this contribution by December 31st of that year in order to exclude that amount from taxable income.
- Account – You can only make these donations from IRAs and not 401(k)s or other retirement accounts. If you want to take advantage of qualified charitable donations, you must first rollover funds from other retirement accounts into an IRA.
- Charity – The charity you choose must be a 501(c)(3) organization in order to qualify. You can choose one charity or multiple charities in the same year.
- Direct Transfer – In order to qualify for the tax break, you must transfer funds directly from your IRA to the qualifying charity. If you withdraw the money first and later donate it, you will not receive this tax break.
As long as you meet your required minimum distribution, you can benefit from setting up an IRA qualified charitable distribution. It is important to know that you do not have to donate the entire amount in order to qualify. Many individuals choose to donate part of their required distribution to charity and withdraw the rest as retirement income.
If you are a charitable person, it makes sense to donate directly from your IRA to avoid paying income tax on that money. The higher your tax bracket, the more money you can save by setting up an IRA qualified charitable distribution.
Since the Tax Cuts and Jobs Act increased the standard deduction, taxpayers are less able to itemize on Schedule A. This means that an upfront deduction, such as an IRA qualified charitable distribution, could be even more important when lowering your taxes.
Contact Our Northern Virginia Trust and Estates Law Firm
An experienced Virginia tax attorney can help you understand the new tax laws and how that might affect your future. Taxes can be complex and difficult without the help of an experienced attorney.
For more information about trusts, wills, estate planning, or our services and packages, contact our office today at 703.719.4846 or click here to visit our website.