Q: In your recent Post Register article you talked about IRAs and the RMDs that go with them starting at 72 now. You did not mention if there are donation/deduction options prior to 72 (but after retirement) when deductions can also happen — just not “required.” You also did not mention 401K’s which I believe are treated the same as an IRA? The reason I ask is that several mission “buddies” say that they are using the 401K deduction for church donations even though they are “before 72” (currently). When I read the IRS rules that does not appear to be an option. I can’t figure out if they have “creative accountants” (all are advised on their taxes by CPAs) or if it is legal. My own CPA daughter (after reading the statutes) believes it is not (though admittedly not expert on tax law).
A: The provision mentioned in my prior column only applies to RMDs (required minimum distributions). Distributions to the charities prior to the age 72 RMD requirements are not excluded from income tax.
As you indicated, 401Ks are treated the same as IRAs.
RMD distributions to an individual prior to age 72 are taxable. If this money is contributed to a church or other charity, it could still be deductible as an itemized deduction but because of the present high standard deduction ($24,800 (plus $1,300 for each spouse over age 65) for a joint return in 2020 and $12,400 (plus $1,650 because the taxpayer is over age 65) for a single taxpayer in 2020) most people can’t itemize and since the standard deduction would otherwise be available, they are in essence only receiving the deduction for the amount in excess of the standard deduction that they would receive anyway.
As you are probably aware, the RMD requirements only apply to “traditional” IRAs and 401Ks as opposed to “Roth” IRAs. This is because the Roths have been previously taxed and therefore neither the Roth principal nor the earnings on the Roth will be taxable to you when you receive distributions from it. Therefore, the above comments would still be relevant as to deductibility of the Roth distribution to charity. Thus, you are entitled to the itemized deduction, but you will only get the benefit of it to the extent it exceeds the standard deduction which you would receive in any event.
Therefore, rely on your CPA daughter, not your “buddies” for your tax advice.
Robert E. Farnam is an attorney practicing in Idaho Falls. This column is provided by the 7th District Bar Association as a public service. Submit questions to “It’s the Law,” P.O. Box 50130, Idaho Falls, ID 83405, or by email to [email protected]. This column is for general information. Readers with specific legal questions should consult an attorney. A lawyer referral service is provided by calling the Idaho State Bar Association in Boise at 208-334-4500.