Tax Smart Way for Retirees to Donate

Many retiree’s have Individual Retirement Accounts (IRA) and have Required Minimum Distributions (RMD) that must occur after a certain age.  Under current tax law, a Taxpayer may direct those payments directly to charity and this may create a better tax situation for those philanthropically inclined.    

The RMD is not treated as taxable income and the charitable deduction is disallowed for income tax purposes.  The reason this creates a better situation for the charity and the Taxpayer can be illustrated by the following example.    

Dan is retired, married and he and his spouse are over the age of 70.  He has a pension, IRA and Social Security income.  Their home does not have a mortgage and while he does have real estate taxes and nominal medical expenses, his standard deduction ($27,000 for 2019) is greater than his itemized deductions (even with very generous giving to Divine Savior)  Instead of taking a $10,000 IRA required minimum distribution they instead direct the $10,000 IRA RMD to Divine Savior.  This prevents the RMD from being taxable income and no charitable deduction is allowed (it really is because the income wasn’t taxable, but it becomes what tax nerds call “above the line” versus “below the line”). 
   
However, if he received the RMD directly and donated it to Divine Savior after, the IRS would tax the $10,000 RMD and their standard deduction would still be greater than their itemized deductions, thus negating any positive tax impact for the charitable donation.  If their marginal tax bracket was a combined Federal and State rate of 25% this would result in an extra $2,500 of Taxes!    
Instead Dan created a tax advantaged way of minimizing his tax liability and maximizing his impact to Divine Savior!    

Please consult with your own tax or financial advisor if you are considering this strategy.