If you are retired, own an IRA, and regularly give to charity, there may be a tax-planning opportunity worth discussing before year-end.

Required Minimum Distribution (or RMDs) can increase your taxable income once you reach the applicable age. For charitably minded taxpayers, a Qualified Charitable Distribution (or QCD) may allow you to satisfy some or all of an RMD while potentially reducing the amount of taxable income reported on your return.

At Wilson Accounting Group, we encourage clients with retirement accounts to review their RMDs and charitable giving plans together. The right strategy may help you support organizations you care about while also managing your taxable income and potential Medicare costs.

Traditional IRAs and certain other retirement accounts generally require you to begin withdrawing a minimum amount each year once you reach the applicable RMD age. Those withdrawals are typically included in your taxable income.

Depending on your financial situation, an RMD can:

• Increase your adjusted gross income
• Push more of your income into a higher tax bracket
• Affect the taxation of Social Security benefits
• Increase income used to determine certain Medicare premiums

That is why it is important to review your retirement distributions before simply withdrawing the required amount each year.

A Qualified Charitable Distribution allows an eligible IRA owner to transfer money directly from an IRA to a qualified charitable organization.

Individuals can generally begin making QCDs once they reach age 70½, even if they have not yet reached the age when RMDs are required. Once RMDs do apply, an eligible QCD can count toward satisfying that year’s required distribution.

For example, if you are required to withdraw money from your IRA but already plan to donate to a qualified charity, you may be able to have a portion of that IRA distribution sent directly to the charity instead.

Normally, taking money from a traditional IRA means reporting the distribution as taxable income. If you then donate that money to charity, you may receive a charitable deduction only if you qualify to itemize your deductions. A QCD works differently.

When completed properly, the eligible amount transferred directly to charity is generally excluded from your taxable income. You do not also claim that same amount as an itemized charitable deduction.

This distinction can be valuable because lowering the income reported on your tax return may provide benefits beyond the charitable deduction itself.

Important: If you normally take the standard deduction, a QCD may still provide a tax benefit because the eligible distribution can be excluded from income rather than relying on an itemized deduction.

One important consideration for retirees is Medicare’s Income-Related Monthly Adjustment Amount, commonly called IRMAA.

Higher-income Medicare beneficiaries may pay additional premiums for Medicare Part B and Part D. These surcharges are generally based on modified adjusted gross income from an earlier tax year.

Because a properly completed QCD can keep an eligible IRA distribution out of adjusted gross income, it may help some taxpayers manage the income used in determining future Medicare premiums. This can be especially important if your income is near an IRMAA threshold.

Important: Medicare calculations can be affected by several types of income, so a QCD should be considered as part of your overall tax and retirement plan rather than in isolation.

To receive QCD treatment, certain requirements must be followed:

• You must meet the age requirement for a QCD
• The funds must come from an eligible IRA
• The distribution must generally go directly from the IRA to a qualified charitable organization
• The charity must meet IRS requirements
• You should retain documentation of the contribution
• The transaction must be completed within the appropriate tax year

Simply withdrawing money from your IRA personally and then writing a check to charity generally does not produce the same QCD treatment.

If you are required to take an RMD, don’t wait until the final days of the year to determine how much you need to withdraw. Before taking your distribution, consider:

• How much of your RMD remains for the year
• Whether you plan to make charitable gifts
• Whether a QCD may be appropriate
• How additional IRA income could affect your taxes
• Whether your income could affect Medicare IRMAA surcharges
• How your retirement distributions fit into your overall financial plan

Taking the time to coordinate these decisions may help you avoid unnecessary taxable income while accomplishing your charitable goals.

If you have an IRA, are subject to Required Minimum Distributions, and already intend to support charitable organizations, it is worth reviewing your options before taking your year-end distributions.

A little planning can help ensure your charitable giving works alongside your retirement and tax strategy…not separately from it.

Contact Wilson Accounting Group to discuss how Qualified Charitable Distributions, RMDs, and charitable giving may fit into your financial plan.

Waynesburg Office
69 S. Washington St.,
Waynesburg, PA 15370

Mt. Lebanon Office
300 Mt. Lebanon Blvd., Suite 210A
Pittsburgh, PA 15234

This article is intended for general informational purposes and does not constitute individualized tax, legal or investment advice.