Can qualified charitable contributions be used as required minimum distributions (RMDs) from a variable annuity tax-deferred IRA to minimize taxable income?
I have two annuities that will qualify for required minimum distributions (RMDs) in 2019. The RMDs will total approximately $16,500. My current AGI is $82,000.
How do I establish a qualified charitable contribution, and can I discontinue it anytime I want to? It is my understanding that any part of my RMDs that I use as QCC would not count as income, thereby lowering my overall taxes and increases to Medicare and Social Security. Does it make more sense to include the RMDs as income, claim my charitable contribution as a deduction and pay the additional taxes and put the balance in an investment account? These would not be new contributions. I currently pay them with my living expenses because I’m debt free.
If I read your question correctly, you do not need your RMD money and you also like to make charitable contributions. The QCD is made for someone like you!
You will need to ask your annuity company what their procedures are since each firm has their own paperwork. Usually, it will involve your filling out a form listing the charities and the amount that you want them to receive. You must be 70 1/2 or older when the money leaves your account. The annuity firm will then issue checks to the charities and either mail them directly or give them to you to mail. I have them mailed directly.
You will get a 1099R from the annuity company showing the 16,500 as being distributed to you. You or your tax person will indicate that 16,500 was a QCD. That will result in a ZERO taxable amount appearing on your tax return. You do not claim the charitable contribution on Schedule A.
You must keep the acknowledgment letters from each charity and also DO NOT ACCEPT ANY GIFTS from the charities. That tee shirt or CD will cost you the whole contribution that you made to the charity.
You are 100 percent correct that this may help you avoid paying higher Medicare B premiums and also state income tax.
First, let me say that helping folks make tax smart charitable contributions is one of the most rewarding aspects of my job and what I am most passionate about! Generosity is a gift that I love to encourage!
Qualified Charitable Distribution (QCD) are one of my favorite tools for accomplishing this, assuming that the client is over age 70 1/2. And under the new tax law, the QCD is often even more beneficial (more on that below!)
I will try to answer each of your questions:
1. Your advisor or the annuity rep should be able to provide the appropriate paperwork for completing a Qualified Charitable Distribution (QCD).
2. You should be able to specify amounts, frequency etc... and discontinue at any time.
3. The amount of the QCD will reduce the amount shown as a taxable distribution and therefore should not be shown as taxable income on your tax return. This would potentially decrease your overall taxable income, but might not specifically reduces the taxes on your SS. (See below for details about how SS is taxed). Also, based on your AGI, you would not owe any Medicare. surcharges whether or not you utilized the QCD strategy.
4. In most cases, it would NOT make more sense to take the full RMD amount and then take the deduction. With the new tax law, the standard deduction has increased to $26,600 for married couples over 50 and filing jointly. So you autotmatically get that deduction, which means that many people effectively "lost" the benefit of deducting charitable contributions.
I hope that this inforamtion is helpful to you and others!
Details about how SS is taxed are included below so as not to bore those readers who might not care to go that deep in the weeds!
Lisa G. Hay, CPA, CFP®, RICP®, AIF®
How SS is taxed:
Each year, the portion of your Social Security income that’s subject to federal income tax depends on your “combined income.” Your combined income is equal to:
- Your adjusted gross income (which you can find at the bottom of the first page of your Form 1040), not including any Social Security benefits, plus
- Any tax-exempt interest you earned, plus
- 50% of your Social Security benefits.
If your combined income is below $25,000 ($32,000 if married filing jointly), none of your Social Security benefits will be taxed.
For every dollar of combined income above that level, $0.50 of benefits will become taxable until 50% of your benefits are taxed or until you reach $34,000 of combined income ($44,000 if married filing jointly).
For every dollar of combined income above $34,000 ($44,000 if married filing jointly), $0.85 of Social Security benefits will become taxable — all the way up to the point at which 85% of your Social Security benefits are taxable.
That is great that you have a charitable inclination!! It would be easiest to simply call your IRA administrator and provide them with the charity name and address for where they will send the amount you specify from your RMD. Yes, that is correct that as a charitable contribution you most likely not have to pay any taxes on this withdrawal.
Qualified Charitable Contributions is a great idea for your RMD's, especially since the new tax act is going to give you a much higher standard deductible and you may not get to itemize your deductions. A QCC must be done directly from the trustee of your IRA. Contact the annuity company and tell them what you want to do and they will most likely have a form you will need to complete.