Don’t Miss the IRA Charitable Distribution to Save on Taxes!

Don’t Miss the Qualified IRA Charitable Distribution (QCD) Opportunity to Save on Taxes!

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Chari­table minded seniors need to plan carefully before taking their required minimum distri­b­ution (RMD) this year. The American Taxpayer Relief Act of 2012 (ATRA12) reinstated the ability to make a Qualified IRA Chari­table Distri­b­ution (QCD). Unfor­tu­nately, the reinstated provision is good for one year only and expires December 31, 2013. A QCD allows individuals over age 70½ to directly transfer up to $100,000 from an IRA account to one or more charities. This transfer counts toward your RMD but it doesn’t add to the taxpayer’s adjusted gross income (AGI).

Gifting directly from your IRA can be signif­i­cantly MORE effective than a chari­table deduction for taxpayers that fall into these situations:


Taxpayers who take the standard deduction receive no benefit from chari­table deduc­tions. The standard deduction rates for seniors in 2013 are $14,600 for married taxpayers filing jointly and $7,600 for individual taxpayers. Taxpayers claim the standard deduction if their annual chari­table giving is less than these amounts and they don’t have other deduc­tions to itemize. Making a QCD gives the benefit of writing off the gift while still taking the standard deduction.

Taxable Social Security benefits

Seniors with income above the base amounts of $25,000 (single filer) and $32,000 (joint filer) are subject to federal income tax on their Social Security benefits. For joint filers with incomes above an “adjusted base amount” of $44,000, up to 85% of benefits can be taxed. The trigger point for taxing benefits is based on Modified Adjusted Gross Income (MAGI). Making a QCD lowers MAGI and could poten­tially lower or eliminate the taxation of Social Security. This can be signif­icant. A couple with $30,000 of Social Security income, $15,000 of other income and a $25,000 RMD would have $15,000 of Social Security subject to tax. Their federal tax bill would be $4,000 if they took the standard deduction. Making a $10,000 QCD with some of their RMD would drop the amount of taxable Social Security to $6,800. Their tax bill would be cut to $1,450. That’s a 63% reduction!

Upper Income

ATRA12 also reinstated the phase-out of itemized deduc­tions and personal exemp­tions. The phase-out for itemized deduc­tions (Pease limitation) reduces all itemized deduc­tions by 3% of excess income over an AGI threshold. The AGI threshold in ATRA12 is $250,000 for single taxpayers ($300,000 for married couples). The Medicare surtax applies an additional tax of 3.8% to the lesser of net investment income (NII) or the excess of modified adjusted gross income (MAGI) over the threshold. Threshold levels are $200,000 for single taxpayers and $250,000 for joint filers. Making a QCD lowers MAGI and AGI which in turn will restore some of the lost itemized deduc­tions and reduce the amount of income subject to the Medicare Surtax.

Medicare Premiums

The standard monthly premium for Medicare Part B is $104.90 in 2013. However, a surcharge applies to seniors with higher income. The surcharge starts at modified MAGI of $85,000 (singles) and $170,000 (marrieds) and can be as large as $335.70 a month for each person in the household on Medicare! The calcu­lation adds income from tax-free bonds to MAGI to determine your income level. Making a QCD could lower your MAGI enough to keep you out of the Medicare surcharge range.

Careful planning could be the key to a lower tax bill in 2013 and lower Medicare premiums next year. Normal RMDs increase AGI (and MAGI) which may cause you to lose some tax benefits such as the Pease limita­tions mentioned above, reduction of medical & miscel­la­neous deduc­tions, reduction of passive loss deduc­tions, increased Medicare premiums and/or causing a greater portion of your Security benefits to be taxed. You should consider consulting with your financial adviser to determine if gifting through a QCD makes sense in your circum­stances. There may be factors other than taxes to be considered.

Rick’s Tips:

  • The ability to make a Qualified IRA Chari­table Distri­b­ution ends on December 31, 2013.
  • Taxpayers taking the standard deduction receive no tax benefit from chari­table gifts unless they are made through a QCD.
  • Signif­icant tax savings are possible from a QCD when it reduces the amount of Social Security benefits subject to taxation.