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  • Writer's pictureKyle Flischel, CPA

Charitable Distributions - What you Must Know

We’re almost in the season of giving, so we wanted to focus on charitable distributions. Keep reading for what you must know.

If you have retirement accounts from which you want to make charitable distributions, you may benefit from the direct income reduction and the standard deduction everyone is eligible to receive.

How to Make Charitable Distributions

Charitable distributions must come directly from your tax-advantaged accounts, such as your IRA or 401K.

The distribution cannot be made to the taxpayer, who then donates the money. This is because it doesn’t count as a charitable distribution; instead, it’s a taxable distribution to the taxpayer and a potential charitable contribution deduction on Schedule A.

The account custodian must make the payment directly to the charitable organization based on your instruction. In addition, you must be at least 70 ½ years old to make the charitable distributions.

How Charitable Distributions Affect your Taxes

Unlike charitable donations, charitable distributions don’t get reported on Schedule A of your tax return. Instead, it directly reduces your retirement income. As a result, most taxpayers are eligible to make charitable distributions, reduce their income, and take the standard deduction.

However, there is a limit. You can only claim the first $100,000 of charitable distributions. If you make distributions of over $100,000 to charity, it is included in your taxable income, and may be deductible on Schedule A

How Charitable Distributions can Help IRA or 401K Holders

You may be subject to Required Minimum Distributions if you have a traditional IRA or 401K. Most taxpayers are subject to RMDs the first April they turn 72 years old. If you don’t take the RMD, you could be subject to a penalty of up to 50% of the RMD amount.

If you don’t take distributions, your charitable distributions can satisfy the requirement. The limit is $100,000 for RMD satisfaction, just like the maximum charitable distributions you can use to offset your taxable income.

For your charitable distribution to count toward your RMD, you must request the distribution before your RMD date, which is usually 12/31 of each tax year.

Reporting Charitable Distributions

To report charitable distributions, you can report the full amount on the IRA distribution line on your 1040. You’ll report any amount you donate that’s equal to 100% or less here.

However, keep in mind not all organizations are eligible for charitable distributions. For example, some donor-advised funds and private foundations aren’t eligible.

Final Thoughts

Charitable distributions may help you reduce your taxable income and meet your Required Minimum Distributions.

Not all distributions qualify, as not all organizations are eligible. In addition, the organization must be a 501 (c) (3), but you should always check with your financial advisor to ensure an organization qualifies before making the distribution.

Like regular charitable donations, you must have adequate proof of the distribution, showing the amount you donated, who you donated it to, and that no goods or services were received in exchange for the money.

If you have any questions about charitable distributions or want to know if they will benefit your tax situation, contact Henson and Murtha today to learn more.

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