Charitable Deductions Can Survive: IRA Strategy
New federal tax laws may have a huge negative impact on charitable contributions, as more people are expected to abandon itemized returns in favor of larger standard deductions.
But there is a way, especially for older retirees, to continue donating to charity while reaping the tax benefits.
People over age 70 and a half are required to take a minimum distribution from their Individual Retirement Account each year, and all or a portion of that distribution may be directed to one or more charitable organizations.
The donations are 100 percent tax-deductible if the money is paid directly to the charity rather than going to the IRA holder first, said Jamestown tax preparer Anne Patel.
“You have to tell your account manager where to direct the money,” she said. “You can’t take it now and give later.”
Each year the account holder will receive a form stating the gross amount of the Required Minimum Distribution, or RMD, along with the taxable amount, which is then declared on the federal tax return.
For example, if a retiree is required to withdraw $15,000 and directs $5,000 of that to charity, the taxable amount would be $10,000.
Up to $100,000 per year may be donated tax-free to qualifying charitable organizations, including the Sonora Area Foundation.
Distributions to the Foundation may then be directed to the multiple charitable funds held there, such as Habitat for Humanity of Tuolumne County, Sierra Repertory Theatre, WATCH, Tuolumne County Arts Alliance and many other causes including education, wellness, history, social services and more.
RMDs may also be directed to the Sonora Area Foundation as an unrestricted gift to be used for general charitable purposes.
Patel noted that many people incorrectly believe they will lose the tax benefit of charitable donations if they do not itemize their taxes.
“It’s very important that we get the word out that nonprofits still need our support,” she said. “This is absolutely a very good way to save on taxes.”
Among those already donating their RMDs to the Sonora Area Foundation are Twain Harte residents Mick and Lyn Grimes, whose contributions are split among a variety of causes.
“We like education, the environment and conservation,” Mick Grimes said. “These are the areas we normally support more than anything else. Sometimes we donate based on need, and the Foundation generally knows our wishes.”
Another reason for choosing the Foundation is the ease of giving, he said.
“You can give money to this charity and that on your own, but pretty soon it gets to be onerous,” Grimes said. “The Sonora Area Foundation can do all the leg work for you and get the job done.”
Other factors, he said, include the Foundation’s total breadth of grant-making opportunities, with nearly 200 different funds under its umbrella, and the ability to remain anonymous.
“The other part is they don’t charge any fees, thanks to Irving Symons (who established the Foundation),” Grimes said. “In some organizations the fee structure is pretty healthy, but if you give money to any of the programs here, it all goes directly to them. The fee structure is zero, and that makes a big difference to me.”
Perhaps it is not surprising that Grimes and his wife chose the Foundation to receive their charitable donations since he moved to Tuolumne County in 1997 to become its Executive Director. He served a total of 17 years in the position, including an interim term after the departure of Greg Applegate in 2011.
Grimes formerly was Executive Director of the Foundation for Clovis Schools and has over 50 years experience in corporate management. He is a past board member of the California State Railroad Museum Foundation in Sacramento and is active in Tuolumne County projects including the Tree Mortality Abatement Program and Rocca Park Blacksmith Shop and Museum in Jamestown.
Grimes also serves as an administrative assistant for the Twain Harte Community Services District and sits on a variety of committees for the Sonora Area Foundation.
Lyn, his wife of 52 years, is a retired schoolteacher and an avid quilter.
The Required Minimum Distribution is based on a formula involving the IRA holder’s age and account balance. Those who do not take enough each year may have to pay a 50 percent excise tax on the amount not distributed.
And don’t think you will outlive the tax collector — the IRS age chart goes to “115 and above.”
“It doesn’t take wealthy people to do this,” Grimes said. “It takes people who want to make a difference in our community, and that’s the key.”
For those wishing to create a named fund, you can donate $5,000 or more to establish your own fund at Sonora Area Foundation and take an itemized deduction.
Details are available by contacting the Foundation office at 533-2596 or firstname.lastname@example.org.