August 2022
Tax Planning

Starting at age 72, Uncle Sam wants to make sure you start paying taxes on the money you deferred over the years you were employed.  If you celebrate your 72nd birthday this year, you have until April 1, 2023, to take your first RMD from your tax-deferred accounts (traditional IRA, SEP IRA, Simple and former employer retirement plans if applicable.)  Keep in mind, though, that if you wait until 2023 to take your first RMD you will also have to take another RMD later in the year to meet your 2023 RMD. 

The amount of your RMD varies from year to year because it is based on your age and the Fair Market Value (FMV) of your account(s) as of December 31 of the previous year.  The RMD is calculated by dividing the Fair Market Value by the IRS’s “Uniform Lifetime Table” (Table III).  If your spouse is more than 10 years younger and the sole beneficiary of the IRA, you may be entitled to a lower RMD amount.  

You can certainly withdraw more than the RMD if needed, but keep in mind that these withdrawals will be included in your taxable income, thereby increasing your adjusted gross income (AGI).   There’s another tax-savings option to consider when it comes to taking your RMD – a Qualified Charitable Distribution.  Read on. 

Uncle Sam allows you to satisfy all or part of your RMD by taking a Qualified Charitable Distribution (QCD). If you are charitably inclined, you are able to make a QCD at age 70 ½, even if you are not subject to RMDs.  Generally, if you complete a QCD it’s a non-taxable distribution if made directly from your IRA to an eligible charitable organization.  What’s important to note when preparing your taxes is the custodian of your IRA will not report a QCD as a tax-free distribution on IRS Form 1099-R.   To report a QCD on Form 1040 you or your tax preparer will report the full amount of the charitable contribution on the line for IRA distributions.  Then, on the line for the taxable amount, enter zero if the QCD represented the entire RMD or a lesser amount with “QCD” notated next to this line.

With the standard deduction being much higher now, fewer taxpayers are able to itemize.  The good news is a QCD would help to lower your AGI and could potentially lower your income taxes (see examples below). If you do itemize, a QCD may not be listed as an itemized deduction on Schedule A of your tax return as it would be double-counted.  Another caveat: a QCD cannot exceed $100,000 per taxpayer, per year.

Below are 2 scenarios to illustrate the tax benefit for a retired married couple, filling jointly in 2022 by taking a $110,000 RMD and donating a $15k to an approved charity:

Pros of QCDs vs an Itemized Charitable Donation:

• May lower your taxable Social Security

• May lower Medicare Part B & D premiums

• Lowers your Modified Adjusted Gross Income

• May allow a greater amount of itemized medical expenses to be deducted

We would be happy to discuss your individual circumstances to see if a QCD makes sense. 

If you have questions, please contact us.

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