Yes, you can use money from your IRA to donate to charity. What’s more, your donation from a traditional IRA will be nontaxable since Congress and President Obama made that tax break permanent at the end of 2015.
How a Qualified Charitable Distribution from an IRA Works
Normally, when you take a distribution from a traditional IRA, you pay taxes on it since you didn’t pay taxes on the money when you put it into your IRA. But if you are age 70½ or older and make a contribution directly from your traditional IRA to a qualified charity, you can donate up to $100,000 without it being considered a taxable distribution. To avoid paying taxes on the donation, you must follow the IRS’s rules for qualified charitable distributions (QCDs), also called charitable IRA rollovers. Most churches, nonprofit charities, educational organizations, nonprofit hospitals and medical research organizations are qualified charities. The charity you give to will not have to pay taxes on your donation.
Since you are already getting a tax break on your donation, you cannot double dip and also claim the donation as a deduction on Schedule A. You’re allowed just one tax break, not two. If you make other donations to charity that don't use your IRA funds, however, you can still claim each of those donations as an itemized deduction on Schedule A. If you don’t itemize your deductions on Schedule A and you take the standard deduction on your annual tax return instead, a charitable IRA rollover will give you a tax break that you otherwise couldn’t receive for donating money.
QCDs and Required Minimum Distributions
You can also use your qualified charitable donation to meet all or part of your IRA’s required minimum distribution (RMD) for the year. Traditional IRA owners must start taking RMDs at age 70½ or face tax penalties. The charity must receive your donation by Dec. 31 for you to apply it to that year’s tax return. Roth IRAs do not require distributions while the account holder is alive.
Qualified charitable donations are also a good choice for individuals who otherwise could not deduct all or part of their charitable donations because of the IRS rule that says you cannot take a tax deduction for the amount of your donations that exceeds 60% of your adjusted gross income (AGI). At first glance, this rule might sound like it only affects wealthy taxpayers who give generously, but it also affects anyone who is retired and has little to no income but still wants to make a tax deductible donation.
Tax Filing Requirements
Your IRA trustee will use IRS form 1099-R to report your qualified charitable distribution when you file your annual tax return. You will then report this information on form 1040. You should also keep your own records of the donation date, the account from which you made the donation, the amount you gave and the charity you donated to in case there is any discrepancy. You also need a receipt from the charity stating that you did not receive any goods or services in exchange for your contribution. If you do, the amount of your donation is reduced by the value of the goods or services you received in exchange, and that part of your donation will be taxable.
The Bottom Line
Using your IRA to make a charitable donation can help you lower your tax bill and help any charity you designate, as long as it is a qualified 501(c)3 organization. Keep in mind, too, that distributions must be made directly to the charity, not to the owner or beneficiary. All distribution checks need to be made payable to the charity or they will be counted as taxable distributions.
Another way to donate IRA assets to charity is through your estate after you pass away by naming the charity as the designated beneficiary of your IRA. The charity will receive whatever percentage of your IRA assets you provide for on the beneficiary form.
Distributions from SIMPLE IRAs are not eligible to be qualified charitable donations.