Should I make a charitable donation to lower my tax liability?
I will be taking out my first RMD this year; unfortunately that will bump me up to a higher tax bracket. Would it be wise for me to make a charitable donation to my local university in return for yearly payments for life while taking a tax deduction? Or should I establish a charitable trust or something similar to that?
There are a number of strategies around chritable giving that can help reduce your tax bracket. Charitable donations can help, but only if charitable donations and other itemised deductions are greater than your standard deduction. One way increase charitable donations is to "bunch" your charitable donations from multiple years into one tax year. Although trusts can be used, a Donor Advised Fund (DAF) is a vehicle that can be used to receive the charitable donations in the current tax year that can be distributed to charities over time. Most Donor Advised Funds have a very comprehensive list of eligible charities that you can select from.
Another option is to make a donation to a charity using a qualified charitable distribution (QCD) from your IRA. QCDs made from your IRA are exempt from taxation up to $100,000 as long as the distribution comes from a qualified account and is donated directly to a charity that meets the IRS requriements. Qualified Charitable Distributions cannot be made to a Donor Advised Fund (DAF).
There number of factors to consider: What is your tax bracket, did you have a standard deduction or itemized deductions, will you have enough funds to last through retirement, do you want to leave a legacy to your hiers. Seeking the assistance of a tax of financial planning professional to run through the scenarios for your specific situation can help you optimize the outcome that is best for you.
You didn't say how old you are, but if you are taking your first required minimum distribution then I am guessing that you are about 70 or 71. As soon as you turn 70-1/2 then you are permitted to contribute up to 100 thousand dollars each calendar year from your non-Roth retirement accounts directly into charitable and other 501(c)(3) organizations for the rest of your life. These withdrawals count toward your RMD and are fully nontaxable on your 1040 and other tax returns.
Therefore, instead of wasting unnecessary effort and time and money establishing a donor-advised fund, transfer either securities or cash from one or more of your non-Roth retirement accounts each year toward your favorite charities, being sure not to exceed the 100-thousand-dollar minimum each calendar year. This is superior to other forms of charitable giving since these amounts aren't affected by your standard deduction, your itemized deductions, or anything else.
The key is to make sure that each contribution is made directly from your non-Roth retirement account into a charity. Do not first transfer the securities or cash into a personal account as it will invalidate the contribution for tax purposes.
Ultimately I advise my clients to donate to charitable organizations that they have some ties too or want to support. Donating simply to get a tax break - will not make financial sense in most cases.
Either way, consider bunching your donations for 2 or more years into a single larger donation to capture as much tax savings as possible, especially if you are typically taking the standard deduction under the new Trump Tax Plan.
For more RMD tips give this post a read: RMD Tips to Maximize Your Retirement Savings
The easiest and most accurate way to know when to collect your SS income is to login to your SSA website to see the difference.
You stated correctly that if you do not work from 62 to 67, you would have five “zeros.” However, SSA income is based on the average of the highest 35 years of one’s earning records. Thus, if you have had a good earning history up to 62, I doubt five zeros would make much dent to your benefits.
On the other hand, if you take the benefits at 62, that’s a permanent reduction (25%) of your benefits for your lifetime. The only way to get back that loss is via simultaneous working. Then, you will run into the problem of an “earned income limit,” which SSA holds $1 for every $2 of your earned income above the threshold of $17,640 (2019) for people who are not at full retirement age and collect SSA while working.
So, be careful of what you intend to do. Best!
In this situation, if you don't need the money your best option is probably to do a direct contribution of your entire RMD to the university. At this point, even a charitable trust (although a more simple solution is a Donor Advised Fund) would not exempt you from the RMD so donating the RMD directly is the only charitable move that could decrease your taxes immediately.