Save taxes by donating to Salvation Army OC through your IRA

Feb 12, 2024 | by Lynn Freer

Last week I received my annual IRA statement that told me the amount that I must withdraw from my IRA this year. This is called the required minimum distribution or RMD. Each year I donate a portion of my RMD to the Salvation Army OC. When I do this I not only help the Salvation Army but I save tax dollars!

Here’s how it works:

Once an individual turns 70 ½, that person may generally do a Qualified Charitable Distribution (QCD) of up to $100,000 from their IRA to a qualified charity, like the Salvation Army OC. What happens is that the IRA trustee sends the distribution directly to the charity. Whether large or small, this action will save taxes because the amount of the distribution is not included in income. If the individual takes the RMD in cash and then contributes it to charity, the amount is included in income and then they take an itemized deduction of the same amount on their Schedule A, which will likely result in a reduced tax saving.

How the QCD affects taxes:

For lower income taxpayers, Social Security benefits, the benefits may be subject to tax under a complex formula. A QCD enables you to effectively lower your income for this calculation, thereby potentially reducing tax liability.

For higher income taxpayers a QCD reduces your adjusted gross income for various other tax purposes. This may have a domino effect on the rest of your tax return, including deductions and credits that may be reduced or eliminated and other taxes such as the alternative minimum tax, imposition of the Net Investment Income Tax, as well as limits on itemized deductions on the California return.

Let’s look at two examples:

Dana is age 74 and has an RMD of $2,000. He contributes $2,000 per year to the Salvation Army OC. Dana no longer itemized deductions because the house is paid off. If he takes the RMD, his taxable income increases by $2,000 and he gets no charitable contribution deduction because he doesn’t have enough deductions to itemize. So he has no tax savings. Doing a QCD through the IRA means that his income will drop by $2,000 because he doesn’t have to include the $2,000 in his adjusted gross income for either federal or California purposes. Also, the elimination of the $2,000 reduces his taxable social security.

Robin is age 74 and has an RMD of $100,000. Robin normally donates $50,000 per year to the Salvation Army OC. She a high income and is in the maximum tax bracket for both federal and California. If she takes her RMD of $100,000 her adjusted gross income will increase, causing her tax to increase because many phaseouts and additional taxes are based on adjusted gross income. Her net out of pocket for tax will decrease.

Caution: Taxes are so complicated and there are other twists and turns in the tax law. So, if you are interested in making a QCD, please contact your tax advisor to get a review of the benefits for you.

Lynn Freer is a retired tax professional with over 50 years experience in preparing tax returns and teaching tax law to tax professionals.

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