29 Sep Can I pay church dues through my IRA as a charitable donation?

Q. Is it considered legal to use a Qualified Charitable Distribution (QCD) from an IRA to pay your annual church dues? I know someone who says she does this annually but I wondered if it is legal in the eyes of the law?
— Curious

A. This is a great question.

It involves some understanding about how IRAs, contributions to charitable organizations and taxes work.

At a certain age, every IRA owner is required to begin taking Required Minimum Distributions (RMDs) from the account, said Gary Botwinick, an estate planning attorney and chair of the wills, trusts and estates group at Einhorn, Barbarito, Frost & Botwinick in Denville.

He said the laws affecting RMDs have changed quite a bit over the past two years thanks to the SECURE Act, short for the Setting Every Community Up for Retirement Enhancement Act of 2019, which became law on Dec. 20, 2019.

“If you reached the age of 70 ½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020,” he said. “If you reach age 70 ½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach 72.”

However, as a result of the Coronavirus Aid, Relief, and Economic Security Act — the CARES Act — RMDs are suspended for 2020.

Botwinick said if you wish to make a contribution to a charitable organization and you are over the age of 70 ½ , you can direct that a distribution from your IRA be made directly to a charitable organization. That distribution will be used to satisfy your RMD, dollar-for-dollar.

This is called a Qualified Charitable Distribution (QCD).

This will result in that share of the RMD not being considered taxable to you.

But isn’t that the same as getting the distribution, including it on your income tax return and then deducting it on your return as a charitable contribution? Either way you pay no tax on the distribution, right?

Not exactly.

“Since the standard deductions have been increased for federal income tax, you may not get the benefit of a charitable deduction because you are much less likely to itemize your deductions in tax years after 2017,” he said. “So you have to include the income, but you don’t get the benefit of the deduction.”

The QCD is not added to your income, so you still get the same standard deduction but now your taxable income is less. That means you effectively get the equivalent of the standard deduction and a charitable deduction — as the income is not included on your return, Botwinick said.

Unfortunately, the QCD will be included in your taxable income for New Jersey tax purposes without a corresponding charitable deduction, he said.

Your friend is using her QCD to pay her church dues. Should this qualify as a charitable contribution if she is getting something in return?

Normally, when you receive something in return for a charitable contribution, you can’t deduct the full amount of your donation, Botwinick said. The deduction must be reduced by the value of the benefit received.

“So you are likely thinking that since your friend is using the QCD to pay her church dues, thus allowing her, presumably, to participate in the services at the church, she is getting something in return and she should not be entitled to treat this contribution as fully deductible,” he said. “However, the federal tax laws exempt `intangible religious benefits,’ such as admission to worship services, as a benefit received in return that would reduce the value of the contribution.”

So, your friend is doing well by doing good, Botwinick said, and she would be entitled to use the QCD to satisfy her dues as well as her RMD requirement.

“Moreover, she satisfied her charitable desires in a very tax-efficient manner,” he said. “Well done.”

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This story was originally published on Sept. 29, 2020.

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