Using your individual retirement account to make donations can be a smart tax strategy. By making a charitable contribution right from your IRA, you keep income off your tax return. You can also meet your requirement to make an IRA minimum distribution by doing a charitable rollover. However, donating appreciated stock in your IRA isn't always the most tax-efficient way to support your church or other charitable organizations.
IRA Distribution Rules
When you take a normal distribution from a traditional IRA, it's taxed as regular income, regardless of what type of income you take out. IRA distributions don't get broken down into capital gains income, qualified dividend income and regular income -- they're just all regular income. Furthermore, once you reach age 70 1/2, you have to start taking money out of your IRA, whether or not you want to. Donating from your IRA to your church or synagogue not only can help you support your religious organization, it can minimize your tax liability.
IRA Charitable Direct Donations
The IRS will let you make a special qualified charitable distribution from your IRA if you're at least 70 1/2 when you make the donation, although that provision was set to expire at the end of 2013 based on the laws in place as of August 2013. With a qualified charitable distribution, you can roll up to $100,000 directly to your church or other public charity from your IRA. Because the money goes from your IRA to the charity, you don't have to report the income and then take a deduction -- the money just disappears. Furthermore, your qualified charitable distribution can meet your obligation to take a minimum distribution.
Withdraw and Donate
You can always take a distribution of stock from your IRA and then donate the shares to your church, letting the write-off for the value of the shares cancel out the income you realize by pulling stock out of your IRA. But if you do this, you won't be able to write off your donation unless you itemize your deductions. Furthermore, making your donation this way increases your adjusted gross income, because the distribution is counted in your income. This can reduce your ability to claim deductions.
A Better Way
Although making a qualified charitable donation of stock to your church from your IRA can be a good way to give money and get a tax benefit from it, there's a better way. Instead of donating stock from your IRA, you can donate appreciated stock from your taxable account. If you do that, you get to write off the stock's value at the time of its deduction instead of writing off what you paid for it. For instance, if you have a $50,000 block of stock for which you paid $10,000, you'd get to write off $50,000 on your taxes, and you'd also avoid paying the capital gains tax on the $40,000 in appreciation on the stock.
- Kitces.com: Special 2012 Lookback Rules to Make a Qualified Charitable Distribution (QCD) from an IRA in 2013
- IRS: Retirement Topics -- Required Minimum Distributions (RMDs)
- IRS: Publication 17 -- Your Federal Income Tax for Individuals
- Kitces.com: MailBag: Is a Qualified Charitable Distribution (QCD) From an IRA Better Than Donating Appreciated Securities?
- Brand X Pictures/Brand X Pictures/Getty Images
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- What Deduction Do Church Offerings Fall Under?
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- What Is the Maximum Upper Limit for Charitable Federal Tax Deductions in the United States?
- The Tax Benefits of Gifts Vs. Donations
- Borrowing Against an IRA
- Tax Consequences of Donating Inherited IRAs