Greetings. I trust that this will find you well and enjoying life!
In retirement managing taxes, in other words getting every possible tax break that you can based on your circumstances, can be as important as effectively managing your portfolio. Are you working with a good tax preparer and tax advisor who is in tune with your situation to make sure you take advantage of all tax breaks that apply to you? Here’s an example of an often overlooked tax break that involves retirement, which a good tax advisor would introduce to you at an appropriate time.
A popular tax break that expired at the end of 2014 has regained new and permanent life. That can be a big thing for older Americans who are charitably inclined and for charities as well. Recently an expired provision in the tax code was made permanent, that generally allows an IRA owner age 70 ½ or older to transfer (donate) as much as $100,000 a year from their IRA to qualified charities …. tax free. The transfer is excluded from income and if done properly, counts toward the required minimum distribution for the year. Although the provision expired at the end of 2014, Congress resurrected it late last year making it retroactive to the start of 2015 and making it permanent.
The transfer is tax free but is not tax deductible. However often donors value this provision. The required minimum distribution forces distributions from an IRA starting at 70 ½ and therefore triggers income tax. But because the transfer to the charity serves in essence as taking the RMD, it won’t inflate income thus helping the donor in several ways. A lot of tax deductions, credits, phase outs and other variables that are a part of the tax calculation are tied to adjusted gross income. Thus by excluding qualified charitable transfers from income, using this provision can help reduce cost in a number of ways. It may help them avoid paying taxes on Social Security benefits and from having to pay higher Medicare premiums. Moreover if these IRA transfers to charity weren’t excluded from income, the donor could get hit in other ways. Higher adjusted gross income might make one more likely to be subject to the tax on net investment income. And it might increase the phase-out for many other deductions and credits. By keeping adjusted gross income lower through a direct IRA required minimum distribution to a charity, a taxpayer may increase the power of these other breaks.
A final note is that most tax payers can’t deduct their charitable deductions anyway because they don’t itemize and instead claim the standard deduction. A direct transfer to the charity of the required minimum distribution serves to reduce their income and thereby their effective tax rate.
If you need a tax advisor familiar with working with retirees or have questions about the above or any other retirement related matter, contact me and I will be glad to help. Remember that knowledge is power.
Jeff Christian CFP CRPC