Momentum - Business to Business Online Magazine MOMENTUM October 2019 | Page 20
TAXING MATTERS
T. MARK RUSH, CPA
Partner
Ham, Langston & Brezina, LLP
[email protected]
Make the RMD From Your
Traditional IRA Tax-Free
O
nce you turn age 70 1/2, the tax code
mandates that you withdraw a tax code–
defined required minimum distribution
(RMD) from your traditional IRA.
But by using the RMD or other IRA
distribution with a qualified charitable distribution
(QCD), you can eliminate the RMD tax bite, possibly
reduce your Medicare premiums and income taxes on
your Social Security benefits, and more.
After you reach age 70 1/2, the tax code allows you to
donate directly from your IRA account up to $100,000
per year in QCDs.
• The QCD-donated money escapes income taxes and
also does not count as adjusted gross income (AGI).
• The QCDs can satisfy all or part of your RMD
requirement.
• The QCD doesn’t bump up against the 50-percent-of-
AGI ceiling that applies to cash donations.
You likely will want to use the QCD if you donate
money to your church, a school, or some other 501(c)(3)
organization, such as the Red Cross or American Cancer
Society.
Rule 1. You must make your QCD donation to a
qualifying 501(c)(3) organization, such as your church,
a school, or the Red Cross. Your QCD cannot go to
a private foundation, a donor-
advised fund, or a charitable
supporting organization.
Rule 2. Don’t touch the money. The
trustee must make the check or
transfer payable to the charity (not
to you).
Double dip. You get a double-dip
benefit when you don’t itemize
deductions and you contribute
directly from your IRA to a charity.
• First, you get the benefit of the
standard deduction.
• Second, you get the benefit of
the direct charitable contribution
deduction because it cancels
your RMD income, making the
RMD tax-free.
To put this another way, with the
IRA-to-charity contribution, you (the
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MOMENTUM
non-itemizing taxpayer) create a deduction where none
existed before. And because of the Tax Cuts and Jobs
Act, you are less likely to itemize these days.
Save on Medicare premiums. The government
bases the Medicare premiums that you pay on the AGI
reported on your tax returns two years ago (e.g., your
2019 payments are based on your 2017 tax return). To
see how you can save, consider this:
• If you take the IRA money directly, it adds to your AGI,
which can increase your Medicare premium costs in
2019.
• If you use the QCD method, you add nothing to your
AGI.
Pay less tax on your Social Security benefits. Before
1984, you paid no income taxes on your Social Security
benefits. Today, you have to add together your AGI,
your tax-exempt income, and half of your Social Security
benefits, and then pay taxes at your regular tax rate on:
• 50 percent of the Social Security benefit on the
computed amount if that computed amount is
between $25,000 and $34,000 ($32,000 and $44,000
on joint returns), and
• 85 percent of the Social Security benefit on the
computed amount that exceeds $34,000 ($44,000 for
joint returns).
The taxable RMD adds to your
AGI and can make more of your
Social Security benefits taxable.
Solution. Avoid the RMD taxable
income inclusion with the direct
IRA-to-charity donation, and that,
in turn, can cut the taxes you are
paying on your Social Security
benefits.
Shrink the net investment
income tax (NIIT). You pay the
3.8 percent NIIT on investment
income when your modified
AGI is greater than $200,000
($250,000 for joint returns).
Would your required IRA RMD
make you subject to this tax? If
so, consider making the RMD
disappear with the direct IRA-to-
charity strategy.