Retirees - Maximize Charitable Contributions and Save Taxes When Taking Your RMD

Here’s something retirees age 70-1/2 should consider when thinking about how to save on their taxes. Many retired taxpayers may be losing the federal deduction for charitable contributions they make due to the increase in the standard deduction under the federal Tax Cuts and Jobs Act of 2017 (TCJA). However, for retirees who are over age 70-1/2 that must take a Required Minimum Distribution (RMD) from their Individual Retirement Account (IRA), there is still a way for them to keep their charitable deduction and help save on taxes.

Instead of taking the RMD out of their IRA account, receiving the money directly, and then making a charitable contribution out of those funds, the retiree as described above may make a withdrawal from their IRA and send it directly to a qualified charity of their choice.

The donation amount, not to exceed the RMD amount, will be considered as made with pre-tax dollars. This is where the tax savings comes in:the donation amount will not need to be included within taxable income for the year and it satisfies the requirement to take the RMD, which can result in considerable tax savings.

For example, if your RMD is $20,000, and you make a qualified charitable donation of $15,000, only $5,000 of the $20,000 is to be included in your taxable income. In addition to excluding the $15,000 qualified charitable donation from your taxable income, it also reduces your overall adjusted gross income, which may result in some additional tax savings.

Note that a qualified charitable donation is not allowed for certain retirement plans, such as a 401(k) or 403(b) plan account. If you have such accounts and would like to make a qualified charitable donation, it may be worth considering whether rolling these accounts over into an IRA makes sense, since qualified charitable donations are allowed from IRA accounts. Consult your investment and tax advisors about such a change.

Also note that there are certain limitations and requirements that need to be met in order to take advantage of this great tax planning tool.  

By giving your Tronconi Segarra & Associates tax advisor a call, he/she can talk with you about this tax planning opportunity as well as others that are tailored to your unique situation that may help you reduce your tax obligation.

You can reach our tax advisors by calling 716.633.1373, or by emailing Info@tsacpa.com. Call today to schedule your appointment.

Author: June Callari, Tax Manager

TSACPA