Let’s assume you find yourself in a position where you no longer itemize your tax deductions on Schedule A of Form 1040 but you wish to make donations to your favorite charities. You are philanthropically minded so you continue to make your charitable contributions, but wish you could receive a tax deduction for your contributions.
If you are a retiree you can have your cake and eat it too! Here’s how . . .
The Consolidated Appropriations Act of 2016 made a temporary tax provision permanent. This provision can represent a very valuable tax strategy for many retirees. Persons wishing to avail themselves of this strategy need to meet 3 requirements:
- Have reached age 70 ½;
- Own a traditional IRA subject to the required minimum distribution (RMD) rules; and
- Wish to make a charitable contribution
Rather than taking RMDs and using that money as a donation to a charity, you make what is referred to as a “qualified charitable distribution” (QCD). A QCD is a direct transfer from an IRA account to a qualified charity. So rather than you making a check payable to the charity, the trustee or custodian of the IRA account writes the check (which cannot exceed $100,000) to the charity.
From a tax perspective, you have satisfied the RMD requirement (for the amount of the QCD) and the RMD is not considered taxable income to you. Thus, you are placed in the same position as if you had to report the RMD income and had an itemized deduction offset. This is actually a better tax result than itemizing the charitable contribution because charitable contributions are limited by a percentage of your adjusted gross income (AGI). Thus depending upon your AGI, some persons may not have been able to deduct the full amount of the charitable gift. But it even gets better!!!
Since the RMD is not included in your income if a QCD is made, your AGI is reduced. This is very important because the lower your AGI, it is possible that a lesser portion of your Social Security benefits are taxed, you may avoid paying higher premiums for Medicare B & D, and your exposure to the 3.8% investment income tax and the .9% Medicare tax are reduced.
If you want to discuss financial planning or your business or personal tax planning and tax preparation concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.