Save a Bundle on Income Tax

Gift box of moneyWhy not give those RMDs to your favorite charity? In addition to saving on income tax, it could keep you below the income cutoff for some other taxes and charges.

As you likely know, everyone at age 70 ½ must begin taking required minimum distributions from their retirement accounts.  You can make a tax-free transfer from an IRA to charity and have that count as the RMD. However, you may question the advantage of doing that versus withdrawing the money and making a charitable donation on your own. Question: If you itemize deductions, doesn’t it have the same effect? Answer: Not necessarily!

If the transfer is deemed to be a qualified charitable distribution it keeps your required minimum distribution outside of your adjusted gross income. This can help you remain under the income cut-off for some other taxes and charges. 

If you are required to take large RMDs from your retirement savings, it could also move you to a category where you would be subject to paying a higher premium level for Medicare. However, making a tax-free transfer of that RMD to charity keeps that sum from the Medicare premiums calculation. If your AGI plus tax-exempt interest income is more than $85,000 for singles or $170,000 if married filing jointly, you'll have to pay higher Medicare Part B premiums. That could be a substantial difference: the monthly premiums are about $109 per month for most people who have their premiums deducted from their Social Security payments or $134 for new Medicare enrollees. Those subject to the high-income surcharge must pay from $187 to $428 per month for Medicare Part B in 2017, depending on their income—plus an extra $13 to $76 added to their premiums for their Part D prescription-drug coverage.

A lower AGI can also help you lower taxes on your Social Security benefits. You need to look at your provisional income, which is your adjusted gross income, not counting Social Security benefits, plus nontaxable interest and half of your Social Security benefits. If your "provisional income" is less than $25,000 and you file taxes as single or head of household—or less than $32,000 if you file a joint return—you won't owe taxes on your Social Security.

If you’re single and your provisional income is between $25,000 and $34,000—or between $32,000 and $44,000 if married filing jointly—up to 50% of your benefits may be taxable. If it’s more than $34,000 if single or more than $44,000 if married filing jointly, 85% of your Social Security benefits could be taxable. Keeping your RMD out of your AGI can help reduce your provisional income.

Remember: if you're over 70 ½, you can transfer up to $100,000 tax-free from your IRA to a charity annually.  However, the funds must be transferred directly from your IRA to the charity to stay out of your AGI.

Reference: Kiplinger (May 12, 2017) “The Advantages of a Tax-Free Transfer From an IRA to Charity”



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Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.