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This fall, older savers who are feeling generous may want to consider using their individual retirement account to help fund their favorite charities.
There’s an incentive for being altruistic: It could help retirees manage their Medicare premiums in 2022.
People who are aged 70½ and over can make so-called qualified charitable distributions from their IRAs. In this transaction, an IRA owner directs the custodian holding the account to transfer up to $100,000 to a charity.
Private foundations and donor-advised funds — tax-advantaged funds for giving — are not eligible to receive qualified charitable distributions.
This move is a staple of year-end tax planning. It helps older savers meet their required minimum distributions — those annual withdrawals that people must begin taking by age 72 — and does so without a tax hit from the RMD.
This year, there is no RMD. The CARES Act, the coronavirus relief measure that went into effect this spring, is allowing savers to skip the distribution for 2020 only.
Nevertheless, a qualified charitable distribution could still make sense for those who were already planning large donations — and it could help keep a lid on premiums for 2022 Medicare Part B (medical insurance) and Part D (prescription coverage).
That’s because giving via a qualified charitable distribution won’t inflate your modified adjusted gross income for that year. You also won’t pay taxes on the distribution.
Your premiums for Medicare are based on your modified adjusted gross income from two years prior.
“Lots of people give away money, I see people give away cash and while that’s awesome from an altruistic perspective, it’s awful from a tax-planning perspective,” said certified financial planner Jeffrey Levine, CPA and director of advanced planning at Buckingham Wealth Partners in Long Island, New York.
“But if you’re 70½ or over? Use the QCD instead of giving cash,” he said.
Income brackets and Medicare
For 2020, single taxpayers with a 2018 MAGI that’s up to $87,000 (or $174,000 if they’re married and filing jointly) pay $144.60 a month for Medicare Part B.
The premiums go up based on your MAGI, all the way up to $491.60 per month for individual taxpayers with a 2018 MAGI of $500,000 or more.
See below for the brackets for Part D premiums for 2020, based on 2018 MAGI.
The income brackets have a cliff effect, rather than a phaseout. That means you’ll face higher premiums if your income exceeds the top end of a bracket.
“If you’re over by $1, it could raise your premiums by thousands of dollars a year,” said Ed Slott, CPA and founder of Ed Slott & Co. in Rockville Centre, New York.
Savers who were already making plans for year-end giving might have other ideas to come up with the cash for a hefty donation. This could come with unintended tax consequences.
“If you had something else that would create taxable income and you were going to liquidate it to give to charity, that distribution increases your adjusted gross income and your taxable income,” said Jamie Hopkins, certified financial planner and director of retirement research at Carson Group.
“This pushes you to higher Medicare charges and could raise your tax rate, too,” he said. “In that situation, you’d benefit from doing a qualified charitable distribution this year.”
Benefits for 2020 taxes
It’s no secret that charitable giving — particularly donations of appreciated stock — can shave a client’s tax liability.
The catch for that type of giving is that he or she must be itemizing deductions on the return in order to write off those donations.
With the standard deduction so high — $12,400 for single filers and $24,800 for married filing jointly in 2020 — it’ll be hard for many taxpayers to meet that hurdle.
Qualified charitable distributions, on the other hand, can be used by those who claim the standard deduction; you don’t have to itemize on your return to use the strategy.
“If you’re giving to charity, you get no benefit from the gift because most people claim the standard deduction,” said Slott. “If you qualify for the charitable distribution, give that way.”