TFA works closely with our clients and their tax advisors in determining the best strategy available to help minimize taxes, and to implement those strategies. This was the case for Trevor, age 72 and Kate, age 70, who came to us needing help with an income distribution strategy and a way to reduce their taxable income. Kate had been retired and accumulated a substantial portfolio balance in her IRA. She needed to take her Required Minimum Distribution from her IRA account by year-end. Trevor was happy to continue working and did not plan on retiring for another two years. Trevor was already taking his Required Minimum Distribution and they were both receiving social security benefits.
In preparation of Kate’s taking her distribution and in gathering information for their taxes, they noticed that the increase in taxable income would affect the amount of medical expenses and charitable gifts that could be deducted for the year on their tax return. The standard deduction was more beneficial, which eliminated some of the miscellaneous charitable deductions that Trevor and Kate wanted to take advantage of. Their main concern though was how to reduce their taxable income.
In reviewing their total income sources for the year (IRA distributions, social security benefits and Trevor’s salary,) it was noted that Kate’s RMD would increase their adjusted gross income by $20,000, also causing 85% of their social security income to be taxed. This then would increase their marginal tax rate significantly, and also increase their Medicare premiums.
In the past, Trevor would deposit his Required Minimum Distribution into their savings account, and during the year they would gift to various qualified charities from their savings.
We reviewed with Trevor and Kate that since they had enough monthly income both from Trevor’s job and their social security benefits to cover their expenses that they should direct a portion of the required IRA distributions to be paid directly to a qualified charitable institution from their IRA accounts. We explained that if you are over 70 ½ any amount (up to $100,000) can be paid directly to a qualified charitable organization from their IRA accounts and will be considered to be withdrawn tax-free and not included in their adjusted gross income, and unlike taking a charitable deduction is not subject to a percentage limitation.
By using this strategy, Trevor and Kate were able to reduce their taxable income by the amount of their charitable gifts. This approach also helped to keep less of their social security benefits taxable and their Medicare premiums from going up.
Trevor and Kate told us that neither their previous investment advisor nor their CPA had recommended this strategy to them.
Names have been changed for privacy purposes.