One aspect of estate planning involves optimizing for the tax code–defined required minimum distribution (RMD). Once you turn age 70 1/2, the tax code mandates that you withdraw an RMD from your traditional IRA. The question, therefore, is how to minimize RMD tax. Depending on your circumstances, you may be able to implement an IRA-to-charity strategy, which involves using the RMD or other IRA distribution with a qualified charitable distribution (QCD). Doing so may not only eliminate the RMD tax bite, but also possibly reduce your Medicare premiums and income taxes on your Social Security benefits, and more.
How it works
After you reach age 70 1/2, the tax code allows you to donate directly from your IRA account up
to $100,000 per year in QCDs. You likely will want to use the QCD if you are giving to charities like your church, a school, or some other 501(c)(3) organization, such as the Red Cross or American Cancer Society. Of course, a number of specific rules apply, so it is advisable to consult a reputable tax agent to help you through the process.
Benefits of an IRA-to-charity strategy
You get a double-dip benefit when you don’t itemize deductions and you contribute directly from your IRA to a charity. You get the benefit of the standard deduction, AND you get the benefit of the direct charitable contribution deduction because it cancels your RMD income. You will save on Medicare premiums. Your adjusted gross income (AGI) would be higher if you take the IRA distribution directly. With an IRA-to-charity strategy, the IRA does not increase your income, and your resulting Medicare premiums will be lower. Similarly, you’ll pay less tax on your Social Security benefits as you won’t be adding a taxable RMD adds to your AGI.
Alliance Tax & Accounting Service has decades of experience helping clients with personal and business tax preparation services as well as business accounting services in southeastern Wisconsin. Contact us at 262-786-4442 for a FREE initial consultation. Visit us online for more information. Please also follow us on Facebook!