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?
A qualified charitable distribution (QCD) is an otherwise taxable distribution from an IRA owned by an individual who is age 70½ or over, that is paid directly from an IRA to a qualified charity. A QCD is a smart, underused, tax-efficient, strategy for charitable gifting.
That said, don't make a charitable donation for the sole purpose of lowering your tax liability. You should also have charitable intent because a gift will cost you irrespective of any tax savings.
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.
Consider making a Qualified Charitable Deduction QCD from your IRA directly to the university, thus reducing your RMD income for tax purposes.
I would encourage you to seek out a “Fee only” independent Registered Investment Adviser (RIA). RIA’s are fiduciaries and will have your best interest at heart. Find one who is a Certified Financial Planner professional ™ (CFP®). You can find advisers at the following websites:
National Association of Personal Financial Advisors - https://www.napfa.org/financial-planning/how-to-find-an-advisor
Financial Planners Association - http://www.plannersearch.org/
XY Planning Network - https://www.xyplanningnetwork.com/
Without knowing the specifics of your income and tax bracket it is hard to make tailored recommendations. I would suggest looking at a possible qualified charitable distribution (QCD) directly from your IRA to a charity of your choice. This would reduce the taxable income associated with your IRA RMD. Alternatively, if you have non-IRA appreciated securities your might consider chunking several years worth of charitable contributions into a donor-advised fund. This might allow you to take a larger itemized deduction in this tax year and then take the standard deduction (perhaps in concert with the QCD mentioned above) in the following year.
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.