If you’re not strategically donating to charity, you might be unnecessarily paying taxes.
Believe it or not you could be donating money wrong. If you’re at least 70½ and taking your required minimum distribution (RMD) from your IRA, you might be able to strategically reduce your taxes.
Every taxpayer either itemizes deductions or takes the standard deduction to reduce the overall tax bill. Itemized deductions are individual expenses that can be combined; the standard deduction is a flat amount. In general, the larger deduction is used when preparing an individual tax return to allow the lowest tax bill due.
In the 2018 Tax Cuts and Jobs Act, the standard deduction was increased and the allowable itemized deductions were decreased, meaning many taxpayers that previously itemized deductions, including donations to charity, instead now take the standard deduction.
If you’re at least 70½ and taking your RMD from your IRA, you have the option to send all or part of your RMD directly to the charity of your choice (as long as it is an official 501c3), eliminating it from your overall income on which taxes are due.
For example, Judy’s RMD for 2020 is $10,000 on which she has to pay income tax because the money has never been taxed. Her charitable giving consists of a monthly donation of $500 to the offering at her church which is a registered nonprofit. In 2020, instead of writing a check each month, Judy decides to send a lump sum of $6,000 directly from her IRA to her church. While the way in which she donates has changed (monthly vs. annual and gross vs. net), she now only has $4,000 added to her overall income instead of $10,000.
An additional benefit of this strategy is if a taxpayer’s annual income affects her Medicare premium. If executed appropriately, this strategy has the potential to help the taxpayer control her premium cost. Many custodians allow for the IRA owner to select multiple charities to send all or part of the RMD as a qualified charitable distribution so make sure to check into potential options for your personal situation.
Every person’s situation is different. This is not tax advice and you should consult a tax preparer regarding your personal situation.