Q: I have given shares of securities to my church in past years to fulfill my pledge and gift away the capital gains. As soon as I turn 72 and the RMD kicks in, I can do donations from my IRA too. Is that a better way to go?
A.: Harry, your ability to make charitable donations directly from your IRA is based on age and not dependent on whether you are subject to Required Minimum Distributions. You are eligible to make a Qualified Charitable Distribution as soon as you turn 70½.
Once you are eligible to make Qualified Charitable Distributions (QCD), determining which is better starts with whether you will itemize deductions or use the standard deduction. Taxpayers may use the standard deduction or the total of itemized deductions when calculating their taxable income. Most people use the larger of the two figures. Itemized deductions are recorded on Schedule A and include items like some medical expenses not paid by insurance, state and local taxes, mortgage interest, and charitable contributions.
If you use the standard deduction or would use the standard deduction if you made no donation, QCD is a better method than donating appreciated assets from a taxable account. By making a QCD in this case, none of the QCD is taxable. In years when Required Minimum Distributions (RMD) are enforced, QCDs count toward the RMD but gross income excludes 100% of the donated amount. Donating shares will only reduce taxable income to the extent the donation makes the total of all the items on Schedule A greater than the standard deduction. In some cases, donations will not reduce taxable income at all.
If you itemize and you would pay tax on capital gains in the year you expect to sell the appreciated securities, donating shares can be the better choice. This is especially true if you are itemizing even without a charitable donation because in that case, all of the donation becomes deductible, subject to certain limits. The attraction to donating shares versus donating cash is that you not only get a deduction for the fair market value of the shares, you also give away any untaxed gain, as you noted.
A side note. The SECURE Act of 2019 lifted the starting age for RMD to 72 and for the first time, allowed workers subject to RMD to make contributions to IRAs. If you are going to make deductible IRA contributions to an IRA at age 70½ or older and intend to make QCDs, see your advisor as the SECURE Act added language making doing both post age 70½ tricky.
One other comment. Thank you for your generosity. I encourage other readers to give to charity if they can too. The COVID-19 shutdowns of 2020 have been hard on a lot of people and many nonprofits that are trying to help are struggling. Many donors are less able to give and many organizations have had to cancel fundraising events. Your donations ins 2020, regardless of form or deductibility, may be more impactful than ever.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo in Orlando, Melbourne, and Tampa, Fla. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.