An annual exclusion from gross income (not to exceed $100,000) is available for otherwise taxable IRA distributions that are qualified charitable distributions. Such distributions aren't subject to the general percentage limitations that apply for making charitable contributions since they aren't included in gross income and can't be claimed as a deduction on the taxpayer's return. Since such a distribution isn't includible in gross income, it doesn't increase AGI for purposes of the phase-out of any deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified levels.
To constitute a qualified charitable distribution, the distribution must be made (1) after the IRA owner attained age 70-½ and (2) directly by the IRA trustee to a charitable organization or a donor advised fund. Also, to be excludible from gross income, the distribution has to be otherwise entirely deductible as a charitable contribution deduction under without regard to the regular charitable deduction percentage limits.
The qualified charitable distribution is a particularly useful strategy for taxpayers who wouldn't withdraw money from their IRAs were it not for the RMD rules, or would withdraw less than the full RMD amount, if they were allowed to. Reason: Even though a direct distribution from an IRA to a charity is not included in the taxpayer's gross income, it is taken into account in determining the owner's RMD for the year.
Year-end strategy for taxpayers who are 70-1/2 or older. Taxpayers who withdraw IRA funds only because they are subject to the RMD requirement should defer taking their RMD until near the end of the year or whenever else in the year that they know how much they will contribute to charity for the year. By doing so, they can know before taking any actual IRA distributions how much their RMD (and AGI, and taxable income) can be reduced by making qualified charitable distributions and thus minimize the amount of their IRA distributions for the year.
Example 1: Jack, an age-71 bachelor, has pension income and substantial personal savings. He doesn't need to withdraw income from his IRAs but he must because of the RMD rules. This year, his RMD is $40,000. Like many other taxpayers, Jack waits until year-end to decide how much to contribute to his favorite charities; this year he decides to make $5,000 of charitable gifts. If he waits till year-end to make his RMDs, he need only withdraw $35,000 if he also makes his $5,000 of charitable gifts via qualified charitable distributions.
Using qualified charitable distributions works especially well if the taxpayer won't be able to claim an itemized deduction for a direct contribution for charity. That will be the case if total itemized deductions for 2018, including charitable contribution deductions, won't exceed the standard deduction of $24,000 for joint filers, $18,000 for heads of household, and $12,000 for single filers (plus $1,300 for a blind or age-65-or-over person ($1,600 for a blind or age-65-or-over person who is unmarried and not a surviving spouse)).
Example 2: Joan, age 71 and single, desires to only withdraw $27,000 from her IRAs in 2018 to supplement her pension and other income but must withdraw $30,000 because of the RMD rules. In past years, she has contributed $3,000 a year to her congregation and has deducted the amount as an itemized deduction. For 2018, her total itemized deductions won't exceed the standard deduction amount and thus a direct contribution to her congregation will yield no tax benefit. A direct contribution of $3,000 from her IRA by way of a qualified charitable distribution will, however, reduce her taxable income by $3,000, and, if she is in the 22% bracket, save her $660 in tax.
Year-end strategy for taxpayers who are not yet 70-1/2. A taxpayer who is younger than age 70-½ at the end of 2018, who anticipates that in the year that he turns 70-½ and/or in later years he will not itemize his deductions, and who doesn't have any traditional IRAs, should establish and contribute as much as he can to one or more traditional IRAs in 2018. If the immediately previous sentence applies to a taxpayer, except that he already has one or more traditional IRAs, he should make maximum contributions to one or more traditional IRAs in 2018. Then, when he reaches age 70-½, he should make qualified charitable distributions. Doing all of this will allow him to, in effect, convert nondeductible charitable contributions that he makes in the year he turns 70-½ and later years, into deductible-in-2018 IRA contributions and reductions of gross income from his age 70-½ and later year distributions from the IRAs.