When you reach 70 years of age, like I did a few years ago, I found a new way to make charitable contributions that, to me, were tax free. That’s right tax free.
First, you must be over 70 ½, second your gift or Qualified Charitable Distribution (QCD) must come from a Traditional or Inherited IRA and third the distribution must be made out to the qualified charity and not to you.
Before I turned 70 ½, I took a distribution from my Traditional IRA, deposited the check and then wrote checks to the organizations we support. Simple. For I and my wife Maryrose, the tax computation was straightforward because the gifts were part of our Itemized deductions and the tax consequence was negligible.
However, the impact on our Medicare Part B costs was another story. Medicare Part B and D premiums are based on your adjusted gross income or AGI. So that gift to Habitat, which was completely deducted from our taxable income did not reduce our AGI.
Your annual Medicare statement will tell you how your Medicare premiums are calculated and how much those premiums will increase if your AGI exceeds certain thresholds. Maybe your gift won’t affect your premiums but, why take the risk? In our case, a large IRA distribution to fund some home improvements increased our AGI thereby increasing each of our Medicare Part B payments by over $600/year. Had we used a QCD for our charitable gifts our AGI would have been reduced by the amount of our gifts and our Medicare premiums would not have changed. That became the impetus for looking at using a QCD rather than paying directly from our checking account.
A QCD makes distributions directly from your qualified retirement account to the 501c (3) charity of your choice. The QCD will count against your annual Required Minimum Distribution, or RMD, but it will not be part of your AGI. As such, you can make a charitable distribution, avoid any income tax, on the distribution, and not affect how your future Medicare premiums will be calculated. That’s also important if you want to make large on-time gift. Maybe for you your best strategy is to continue to itemize deductions but be careful of a large gift that could affect your Medicare premiums.
The 2017 tax law changes make an even more favorable case for using a QCD. If you take the standard deduction, then you cannot itemize your charitable gifts. But you can still use a QCD for your charitable gifting and avoid any taxes on those gifts.
If that sounds interesting, contact your tax advisor or retirement fund administrator and find out if a QCD makes sense for you.
The following links can provide you with more information.