BY DAVE BARTRUFF
Doing income taxes this year for the AARP TaxAide program, I had the opportunity to talk to Panorama residents who were dealing for the first time with having to begin making withdrawals from their IRA accounts due to the Required Minimum Distribution (RMD) laws that kick in at age 70½. Many were shocked by the amount of additional income taxes that had to be paid on these distributions and some wondered what they could do to minimize the additional income taxes.
Sadly, the RMD laws can’t be avoided. They are the last phase of the “pay me now or pay me later” choice that was given to everyone back in the 70’s when traditional IRA’s were created with the promise of being able to avoid income tax on contributions and their growth until they were withdrawn.
Under current IRS rules, when you receive the cash distribution of your RMD from your IRA trustee, the amount received is taxed as normal income. If your marginal tax rate is 25% (single taxpayers with Modified Adjusted Gross Income (MAGI) between $37,450-$90,750 and married taxpayers with MAGI between $74,900-$151,200), for every $1,000 that is received in cash you will owe an additional $250 in income tax. And, to possibly make your tax bill even worse, it could happen that receiving the RMD payment would increase your MAGI to the point that more of your Social Security would become taxable and you might be billed more for you Medicare Part B as well.
However, for retirees who are already making charitable contributions to their church or other tax-exempt organizations (like the Benevolent Fund), or who may be considering starting such contributions when they start receiving the additional cash from the RMD, there is a technique that can be used to avoid taxes on your distributions.
Here is how to avoid taxes on your distributions:
By directing your IRA trustee to send charitable gifts directly from your IRA to a charity, you would not have to pay any income tax on the gift (you never received the money yourself). You also would avoid any possibility of impacting your Social Security and Medicare taxing thresholds. However, if you are still itemizing deductions on your tax return, gifts made directly from IRAs cannot be included as deductible charitable deductions.
Using this technique to avoid taxes on your IRA withdrawals is called a Qualified Charitable Distribution (QCD). Although federal tax code has allowed this for several years, it was permanently written into the tax code at the end of 2015. It is one way to get a bigger “bang for your buck” when you donate to charities and should be considered by anyone starting to receive their RMD for the first time at age 70 and 6 months as well as anyone who can shift their current charitable giving from after-tax dollars to a QCD from their IRA. For example, instead of writing a $100 check each month to your church, direct instead that $1,200 be taken from your IRA via the QCD in annual, quarterly or monthly payments.
Qualified Charitable Distributions count toward your IRA annual RMD requirement. The IRA trustees will send you confirmation of the gift disbursement and the charity will also send confirmation of its receipt. The IRA trustee will issue a Form 1099-R which shows your entire RMD amount for your use when completing your annual income tax return. The confirmation letters will document the portion of your RMD that is exempt from income tax. A QCD can be for any amount up to $100,000 per person and can be made at multiple times during the year a well as to multiple charities.
Making a Qualified Charitable Distribution is easy to do:
- Write a letter of instruction to the IRA trustee that identifies the amount you want to send to the charity along with the name and address of the charity. Many IRA trustees have a Redemption Form that can be used for this purpose.
- Take the instruction to your bank and have them provide a Medal l ion Signature Guarantee. The banks will also require you to bring a statement from your IRA that shows ownership and the latest balance (the local bank branches at Panorama Pan Hall do not provide this service).
- Mail or deliver the instructions, along with an IRS Form W-9, Request for Taxpayer Identification Number or Certification, to your IRA trustee.
Some important points to review:
- IRA distributions must be transferred directly by the IRA trustee to the eligible charity.
- QCD allows you to make charitable contributions that will reduce your Income Tax liability even if you are not able to itemize deductions via Schedule A. In most cases you are better off tax- wise giving charitable contributions using the QCD rather than itemizing.
- QCD may reduce the income taxes you pay on Social Security benefits.
- QCD may reduce the Medicare insurance premiums.
- Includes retirement plans under 401(a), 403(a), 403(b) and (457) that follow IRA rules.
The information provided above is intended to be general and educational in nature and should NOT be construed as a substitute for legal or tax advice. The Panorama Benevolent Fund (PBF) believes that you should approach charitable donations by considering income tax implications as well as estate and gift tax planning goals and objectives . Furthermore, the PBF recommend you consult a professional tax advisor for specific guidance on your personal situation.