Reduce the Tax on your Required Minimum Distributions

If you take Required Minimum Distributions (RMD’s) from your Individual Retirement Accounts and make contributions to charities every year, you may have a tax savings opportunity.  Qualified Charitable Distributions (QCD’s) can be made by direct transfer from the IRA to the charity.  Therefore, you avoid inclusion of the amount transferred from your income instead of taking it as an itemized deduction. 

            There can be a significant impact on your total tax by reducing your gross income.  Many tax benefits are phased out (reduced or eliminated) as gross income increases.  The percentage of your Social Security Income which is included in income increases as gross income increases.  It could even impact your Medicare premiums. 

            A few conditions apply for the transfer to qualify as a QCD and therefore be excluded from your income:

  • It must be a direct transfer from the IRA custodian to the qualified charity.
  • It must be one that would otherwise qualify for a charitable contribution deduction without regard to income-based limits (i.e., a qualified charity).
  • The individual making the transfer must have been at least 70 ½ years old (they have not changed it to 72) at the time of the distribution. 

The maximum annual limit on QCD’s is $100,000.  This is per individual, so a married couple could each do up to that amount if both qualify.  [1]

Here is an example of how it might work.  Jack and Mary Taxpayer have the following income:

  • Investment income                       $10,000
  • Pensions                                        $30,000
  • Combined SSI                               $45,000
  • RMD from IRA’s                         $40,000

Total                                                   $125,000         

They contribute $12,500 annually to their church.  If they do no planning, their federal income tax would be $10,940.  If they make their church contribution through QCD’s, they would eliminate $12,500 from their RMD income.  Their total federal tax burden would be reduced by $2,103 (a 19% reduction). 

            This is one example of the potential impact of the use of a QCD.  Of course, your personal situation will be different.  You should seek specific tax advice from a professional before taking any action. 

Dennis J. Rogers, CPA, CFP® is a Registered Principal offering securities and advisory services through United Planners Financial Services. Member FINRA/SIPC. The information contained in this article is general in nature.  You should seek professional tax and financial advice prior to implementing any of these ideas.  FireSky Financial and United Planners Financial Services are not affiliated. Dennis is a partner in a financial advisory practice in Phoenix that focuses on helping clients make smart decisions about their money based on their personal core values. He can be reached at drogers@FireSkyFinancial.com or 602-748-1900.

[1] IRC Sec 408(d)(8)(A) and (B)