Giving Tuesday, the first Tuesday after Thanksgiving on which thousands of Virginians give to a worthy cause that is meaningful to them, is coming up Tuesday, December 1, 2020. Additionally, as the end of the year approaches and the holiday season is among us, many Virginians like to celebrate by giving financial gifts to charities.
But did you know that by strategically choosing how you fund these charitable gifts, you can save on your 2020 income taxes? Keep reading to learn more.
Save on Your 2020 Income Taxes by Giving from Your IRA’s Required Annual Distributions
If you are 70 ½ or older, the federal government requires you to take minimum distributions from any IRAs you have. But some Virginians have multiple IRAs, or don’t need to withdraw the entire minimum distribution amount of their IRAs in order to meet their annual expenses. This can be problematic, as traditional IRAs include pre-tax contributions that you made during your career, which means that your required minimum distributions will be taxed at current tax rates.
Adding to the problems of required minimum distributions is the penalty you’ll be faced with if you don’t meet them. Anyone who is 70 ½ or older who doesn’t take his or her required minimum distributions from traditional IRAs will be forced to pay a penalty of 50% of the amount they were supposed to take. This means that you’ll be forced to have part of your nest egg taken away from you just because you didn’t need income from it in a given year to make ends meet!
If you don’t need the total amount of your required minimum distributions to meet your annual expenses, there’s a way you can give to charity from your IRAs to both meet the federal required minimum distribution mandate while also saving on your 2020 taxes.
How to Make Charitable Donations from Traditional IRAs to Meet the Required Minimum Withdrawal Rules
In order to make charitable donations given from your traditional IRAs count toward your required minimum distributions, there are several rules you must follow. These include:
You Must Be 70 ½ Or Older
Required minimum distributions only apply to Americans who are 70 ½ or older. Once you reach this age, you can give up to $100,000 from your traditional IRAs to charity, and have those gifts count toward your required minimum distributions without having to pay any income taxes on the withdrawn money. If you’re married and your spouse also has a traditional IRA, he or she can also make a charitable donation of up to $100,000 from his or her traditional IRA and have that amount count as a tax-free required minimum distribution.
You Must Make Your Charitable Donation by December 31, 2020
Charitable donations from a traditional IRA must be made during the current tax year. This means to save big come April 15, 2021, you must make your charitable donation from your traditional IRA by December 31, 2020.
You Must Give to a Registered 501(3)(c) Charity
The organization to which you give your charitable gift must be registered with the Internal Revenue Service (IRS) as a 501(3)(c) charity. Examples of these types of organizations can be found on the popular charity website www.charitynavigator.com. Additionally, if you attend a house of worship, it may be a 501(3)(c) charity, too.
Your Gift Must be a Direct Transfer from Your Traditional IRA to the 501(3)(c) Charity
The IRS has strict rules about how you withdraw your money from your traditional IRA and give it to a charity in order for the funds to be untaxed. You must make a direct transfer from your traditional IRA to the charity. This means you can’t withdraw the money, deposit it in a bank account, and then gift it later. Your hands must never touch the money in order for it to count as a tax-free gift.
Get Help Making Your Tax-Free Charitable Gift from Your IRA
You’ll need the help of an experienced tax attorney like the ones at our law firm in order to properly make a charitable donation that counts toward you required minimum distributions from your traditional IRAs. For help with this process, contact our law firm today at (703) 938-3510 or fill out our online contact form.