Tax Articles

Making a tax-free contribution from your IRA

Knowing the ins and outs of qualified charitable distributions (QCD) can ultimately save you time and money down the road. A QCD is generally a nontaxable distribution from your IRA account made to an organization eligible to receive tax deductible contributions. If you’re over the age of 70½, you may transfer up to $100,000 from your IRA to a charitable organization with­out having to include the income on your Form 1040. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000.

Making this type of distribution allows you to report less income, which could help reduce the impact on taxable social security benefits. Here are a few additional things to keep in mind:

  • Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution.
  • The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income.
  • If your IRA includes non­deductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

A QCD will count towards your required minimum distribution; however, you cannot claim a charitable contribution deduction for any QCD not included in your income.

If you receive one, don’t panic

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Receiving a notice from the IRS might cause instant panic, but there is typically no reason to alarm yourself. Following are a few reasons why the IRS might send you a notice:

  • You have a balance due.
  • You are due a larger or smaller refund.
  • There is a question about your tax return.
  • Your identity needs to be verified.
  • The IRS needs additional information.
  • Your return has been changed.
  • There are delays in processing your return.

Generally, the IRS issues notices to request payment of taxes or additional information. Each notice offers specific instructions on what you need to do to satisfy the inquiry. To avoid any possible interest and penalty charges, you’ll want to be sure to respond to any inquiry quickly and pay as much of any amount due as possible.

Receiving a notice doesn’t necessarily mean you did some­thing wrong, but the worst thing you could do is ignore it. Instead, contact me right away to review the correspondence and, if necessary, respond to the inquiry. In most cases, the IRS requires a response within 30 or 60 days.

And beware of scams, which continue to be on the rise. These include mail, email and phone scams. Keep in mind that the IRS sends notices and letters by mail only, so if you receive a call or email from someone claiming to be from the IRS, it’s more than likely part of a scam. If you receive a piece of mail from someone claiming to be from the IRS, be sure to bring it to me so I can verify its legitimacy before taking action.

Young Tax Service, Inc.

Your Western New York guide through tax preparation and financial planning.