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Retirees Should Consider Transferring Money from their Individual Retirement Accounts to Charity

If you're retired and looking to support your favorite charity this holiday season, experts say there's a way to do so while also trimming your 2022 tax bill. By donating to charity before the end of the year, you can take advantage of any tax breaks that may be available.

November 21, 2022
8 minutes
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If you're retired and looking to support your favorite charity this holiday season, experts say there's a way to do so while also trimming your 2022 tax bill. By donating to charity before the end of the year, you can take advantage of any tax breaks that may be available.

A recent study by Edward Jones found that despite economic uncertainty, the majority of American adults plan to donate similar amounts this year as they did last year.

Retirees may want to consider using qualified charitable distributions (QCDs) when making charitable donations. QCDs are direct gifts from an individual retirement account to an eligible charity. They may be eligible for certain tax breaks.

According to certified financial planner David Foster, founder of Gateway Wealth Management in St. Louis, most people will be better off making charitable giving their first source of financial support. Foster notes that this approach can help people make the most of their resources and make a positive impact on the causes they care about.

If you're age 70½ or older, you may be able to donate up to $100,000 per year and have it count as a required minimum distribution if you transfer the money at age 72. While this maneuver doesn't provide a charitable deduction, you may see other significant tax benefits, financial experts say.

According to Foster, the main advantage of a QCD is that the transfer is not considered taxable income.

It can be difficult for Americans to claim a write-off for charitable gifts if they don't itemize their deductions. However, retirees who take the standard deduction may still benefit from a QCD (qualified charitable distribution). This is because the QCD won't be part of their adjusted gross income.

According to Foster, a QCD can reduce the IRA balance, resulting in smaller required minimum distributions in the future. While this may not be a significant benefit for most people, it is still relevant.

While many people are not motivated to make charitable donations solely because of the tax breaks, Qualified Charitable Distributions (QCDs) may offer a significant tax advantage: reducing adjusted gross income.

"Higher adjusted gross income often triggers a lot of other tax ramifications," said JoAnn May, a CFP and CPA who founded Forest Asset Management in Berwyn, Illinois. "That's why it's so important to be aware of your AGI and how it can affect your taxes."

For example, a higher adjusted gross income may result in higher monthly premiums for Medicare Part B and Part D, she said.

The surcharge, known as the Income-Related Monthly Adjustment Amount (IRMAA), is an additional fee that is applied for one year when an individual's income exceeds a certain level.

May noted that IRMAA is a big issue for her retired clients, who don't like paying it.

Another example of a tax deduction is for medical expenses. If you itemize deductions, you may be able to claim a deduction for qualified expenses that exceed 7.5% of your adjusted gross income. However, if you have a higher income, you will need to meet a higher threshold to claim the deduction.

One of the issues with Qualified Charitable Distributions (QCDs) is that the transfers aren't separated on Form 1099-R. This form reports retirement plan distributions to the IRS.

For example, if you withdraw $50,000 in a year and $20,000 is for a QCD, the form will still report $50,000 in total distributions, even though only $30,000 is taxable income, said Foster.

He said that it is up to the individual to keep track of how much money from their taxes went directly to charity.

Additionally, the payment from the IRA must be made out to the charity. If you write a check from your IRA to a charity at the end of December, it must clear from your IRA by December 31st to count for the year, May said.

Retirees can avoid this issue by having their custodian cut the check.

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