Q: I'm 70 1/2 and need to start taking required minimum distributions from my retirement accounts. I know I can make a tax-free transfer from my IRA to charity and have it count as my RMD. But what's the advantage of doing that versus withdrawing the money and making a charitable donation on my own?
A: If you itemize deductions, the tax break looks the same at first blush. But because the transfer, called a qualified charitable distribution, keeps your required minimum distribution out of your adjusted gross income, it can help you stay below the income cutoff for some other taxes and charges. (People who don't itemize deductions ordinarily don't get a tax break for a charitable gift, but making the tax-free transfer can help them reduce their tax bill.)
If you have to take a large RMD from your retirement savings, you could be pushed into a higher premium level for Medicare. Making a tax-free transfer to charity keeps the money out of the calculation for Medicare premiums. If your adjusted gross income plus tax-exempt interest income is more than $85,000 if you're single or $170,000 if married filing jointly, you'll have to pay from $187.50 to $428.60 per month for Medicare Part B in 2017, depending on your income, plus an extra $13.30 to $76.20 added to your premiums for Part D prescription-drug coverage.
Most people who have their premiums deducted from their Social Security pay premiums of about $109 per month ($134 for new Medicare enrollees).
Keeping your AGI lower could also help you lower taxes on your Social Security benefits. If your "provisional income" is below $25,000 and you file taxes as single or head of household, or less than $32,000 if you file a joint return, you won't owe taxes on your Social Security benefits. (Provisional income is defined as your adjusted gross income, not counting Social Security benefits, plus nontaxable interest and half of your Social Security benefits.)
If your provisional income is between $25,000 and $34,000 if you're single, or between $32,000 and $44,000 if married filing jointly, up to 50 percent of your benefits may be taxable.
If your provisional income is more than $34,000 if single or more than $44,000 if married filing jointly, up to 85 percent of your Social Security benefits may be taxable. Keeping your required minimum distribution out of your AGI can help reduce your provisional income.
You can transfer up to $100,000 tax-free from your IRA to a charity each year if you're over 70 1/2. The money must be transferred directly from your IRA to the charity to stay out of your AGI.
Kimberly Lankford is a contributing editor to Kiplinger's Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org.