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Tax PlanningTax Tips

Make Your RMD Tax-Free With A Qualified Charitable Distribution

Once you turn age 70 1/2, tax law mandates that you withdraw a required minimum distribution (RMD) from your traditional IRA.

But by using the RMD or other IRA distribution with a qualified charitable distribution (QCD), you can eliminate the taxes associated with your RMD. In addition you can possibly reduce your Medicare premiums, possibly reduce the income taxes on your Social Security benefits, and more.

Once you reach age 70 1/2, you are allowed to donate directly from your IRA up to $100,000 per year in QCDs. Some benefits of this provision are:

  • The QCD-donated money escapes income taxes and also does not count as adjusted gross income (AGI).
  • The QCDs can satisfy all or part of your RMD requirement.
  • The QCD is not limited to 50% percent of AGI—that applies to cash donations.

If you donate money to your church, a school, or some other charitable organization, such as the Red Cross or the American Cancer Society you should consider making a QCD.

Rule 1. Make your QCD donation to a qualifying 501(c) (3) organization such as your church, a school, or other charity of your choice. Your QCD cannot go to a private foundation, a donor-advised fund, or a charitable supporting organization.

Rule 2. Don’t take a distribution yourself and then forward the money to charity. The trustee must make the check or transfer payable to the charity (not to you).

Double dip

You get a double-dip benefit when you don’t itemize deductions and you contribute directly from your IRA to a charity.

  • First, you get the benefit of the standard deduction.
  • Second, you get the benefit of the direct charitable contribution deduction because it cancels your RMD income, making the RMD tax-free.

In other words, with the IRA-to-charity contribution, you (the non-itemizing taxpayer) create a deduction where none previously existed. And a result of the Tax Cuts and Jobs Act, you are less likely to itemize.

Save on Medicare premiums

The government bases the Medicare premiums that you pay on the AGI reported on your tax return two years ago (e.g., your 2019 payments are based on your 2017 tax return). To see how you can save, consider this:

  • If you take the IRA money directly, it adds to your AGI, which can increase your Medicare premium costs in 2019.
  • However, if you use the QCD method, you add nothing to your AGI.

Pay less tax on your Social Security benefits

Before 1984, you paid no income taxes on your Social Security benefits. Today, you have to add your AGI, your tax-exempt income, and half of your Social Security benefits, and then pay taxes at your regular tax rate on:

  • 50 percent of the Social Security benefit, if the computed amount is between $25,000 and $34,000 ($32,000 and $44,000 for joint returns), and
  • 85 percent of the Social Security benefit, if the computed amount exceeds $34,000 ($44,000 for joint returns).

The taxable RMD adds to your AGI and can make more of your Social Security benefits taxable.  Avoid the RMD taxable income inclusion with the direct IRA-to-charity donation, and that, in turn, can cut the taxes you are paying on your Social Security benefits.

Shrink the net investment income tax (NIIT)

You pay the 3.8 percent NIIT on investment income when your modified AGI is greater than $200,000 ($250,000 for joint returns).Would your required IRA RMD add to your AGI and make you subject to this tax? If so, consider making the RMD disappear with the direct IRA-to-charity strategy because this lowers your AGI.

If you haven’t taken your 2019 RMD yet, there’s still time to benefit from a Qualified Charitable Distribution. Call us today at 561-826-9303 for help with your tax planning needs.

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