Question: I usually make my annual donations to charity towards the end of the year. I am over 70 1/2 and taking the required minimum distribution (RMD) from my IRA account. My RMD is 100% taxable and it increases my Adjusted Gross Income on my tax return. I read somewhere that the IRS allows taxpayers to pay RMD distributions directly to charities without creating a tax issue. Is this true?
Answer: In 2007 Congress for the first time allowed taxpayers over 70 ½ (70 and one-half) to donate up to $100,000 of IRA money to an eligible charity without reporting the withdrawal as income on their tax return. This process has since become known as a “Qualified Charitable Distribution (QCD)” and is frequently referred to, inaccurately, as a “Charitable IRA Rollover.”
Congress extended the Qualified Charitable Distribution yearly in 2008, 2009, 2010, 2011, 2012, 2013, and 2014, sometimes waiting until the last minute. It wasn’t until New Year’s Day 2013 that they extended the Charitable IRA Rollover for 2012 (the previous year) and 2013 (the New Year). In December of 2015, they finally made the Qualified Charitable Distribution permanent, so we don’t have to wait until the end of the year anymore to find out if we can do a QCD.
QCDs can include your required minimum distribution. Contributions to Charitable remainder trusts, charitable lead trusts, and private foundations do not qualify as QCDs. The IRS does not allow QCDs from non-IRA retirement accounts, which include defined-benefit plans, 403(b)s, 401(k)s, and SEP-IRAs.
QCDs have potential tax-saving advantages for many taxpayers. For those taxpayers who itemize, current tax laws reduce the amount of your itemized deductions if your income exceeds certain thresholds. And by using a QCD rather than simply donating after-tax money to charity, your modified adjusted gross income (MAGI) will be lower. Lower MAGI could lower your taxable social security, lower your tax bracket, lower your capital gains tax, increase your deductions, and lower your Medicare Part B premiums. Higher-income taxpayers pay higher premiums for Medicare Part B. The standard monthly premium for individuals with a MAGI of $85,000 or less is $121.80. For higher MAGI’s, the premiums are adjusted upward. Individuals with a MAGI above $214,000 pay $389.80 per month. MAGI thresholds for married couples are double the threshold amount of an individual.
Here is an example of how a QCD can save you money. Assume (1) Your MAGI is $80,000 before you take your 2016 required distribution from your IRA, (2) You donate $30,000 to charity this year. With your MAGI of $80,000 you will pay $121.80 per month for Medicare Part B. If you withdraw $30,000 from your IRA and include it in your income your MAGI goes up to $110,000 and your Medicare Part B premiums double to $243.60 per month. If you instruct your IRA custodian to issue your RMD check made payable to the charity via a QCD, your MAGI stays at $80,000 and your Medicare Part B premium stays at $121.80 per month. Current year Medicare premiums are based on your tax returns from two years ago, so plan accordingly.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.