Is it true? Can I really? There must be some catch.

By Donald L. Haisman, CFP®, St Cecilia Parishioner

These are some of the responses I have received to my explanation of giving taxes to a charity. My answer is a frank, ‘yes’ you can give some of your taxes to the church or any other qualified charity.

History

You see, Congress made permanent just such a provision in the tax code. But to be perfectly honest, there are two catches. First, you must be age 72 or older, and second, you must make the donation from a qualified retirement plan, like an IRA.

Here is How it Works

Last year’s CARES act temporarily waived required minimum distributions (RMDs) for all types of retirement plans (including IRAs, 401(k)s, 403(b)s, 457(b)s, and inherited IRA plans) for calendar year 2020, but not for this year 2021.

Annual required minimum distributions (RMD’s) from traditional IRA’s, SIMPLE IRA’s, SEP IRA’s, 401(k) plans, 403(b) plans and 457(b) plans must begin starting for the year the taxpayer reaches age 72. These are accounts that you contributed to earlier in your lifetime and did not have to show those contributions as income in those taxable years. Beginning at age 72, the government mandates a distribution of those ‘before-tax contributions’ over your estimated life expectancy. Last year’s CARES act temporarily waived required minimum distributions (RMDs) for all these types of retirement plans for calendar year 2020, but not for this year 2021. The RMD rules do not apply to Roth IRA’s. Also, the RMD amount is not included as part of your itemized deduction for charity on your personal tax return.

Good & Bad

The bad news is these required distributions are fully taxed at your maximum tax bracket each year. The good news is, if you give these distributions to a qualified charity, like Saint Cecilia’s Catholic Community, you do not have to pay the income tax on that distribution.

An Example

Let us say that your RMD is $3,000 for this year. It is quite easy nowadays to

be in the 15 or 25% tax bracket. For easy math let us say you are in the 25% tax bracket. Your $3000 distribution is taxed at your maximum tax bracket, which, in this case, is 25%. Therefore $750 of your $3000 goes to the IRS. You then have only $2250 remaining. Let us say that you, in fact, wish to contribute to our church and you decide to contribute $2250. That is great! In addition, the Parish is most grateful for your generosity.

But, with your newfound knowledge about the RMD provisions in the tax code, you decide rather to make your contribution a bit differently. You contact the custodian of your IRA and arrange to have your $3000 RMD distributed directly from your retirement plan to Saint Cecilia’s. Now the Parish gets the full $3000 AND you save paying the $750 income tax bill. You just gave a chunk of your income tax money to our church.

You should feel a wonderful sense of accomplishment.

Future Gifts

Now, remember you can use this tax saving/giving strategy every year that you have an RMD. This should be your first thought when planning charitable gifting each year. Cash gifts are fine but, only when they are over and above the amount you withdraw from your retirement plan. Why? Because you can gift MORE than your RMD each year. The maximum charitable gift dollar amount allowed from a qualified retirement account is $100,000 per year. And listen to this. If you file a joint return, your spouse can also make such a charitable gift and exclude from taxation up to $100,000. If you decide to give $100,000 or more to St Cecilia, I am pretty sure Father Paul would be very delighted and, who knows, maybe even receive a special blessing or a free lunch.

Get Help

There are a few nuances in the tax code & CARES Act so be sure to contact your accountant, a Certified Financial Planner (CFP®) or your plan custodian for details on how the RMD would apply to your personal situation. Also, if you wish, I would be glad to assist you. My office phone 239-939-3235

Feeling Tax Guilt?

If, on the other hand, you feel guilty about paying fewer taxes, note that the Sacrament of Reconciliation is offered weekly.

®Copyright by Donald L Haisman, CFP®. All rights reserved, used with permission.