Year-End Tax Advice: Essential 2013 Knowledge
NEW YORK ( MainStreet) Do you have to take a required minimum distribution (RMD) from your IRA account this year, but have yet to do so?
Taxpayers age 70½ and older can directly transfer up to $100,000 tax-free from an IRA account to a charity. This charitable transfer can be used to satisfy your required minimum distribution for the tax year.
Ely Mosynary, age 72, must take a fully taxable required minimum distribution of $4,263 from his IRA. Mosynary also owes $5,000 on a pledge to the Visual Art Center of New Jersey building fund. He can contact the trustee of his IRA account and request that $5,000 be sent directly from his account to the Visual Art Center of New Jersey to cover both his required minimum IRA distribution for 2013 and his outstanding pledge. The $5,000 is not reported as income on his Form 1040, but he cannot deduct the $5,000 as a charitable contribution on his Schedule A.
If Mosynary received the $4,263 from his IRA and then donated $5,000 to the Art Center, he would have to claim the distribution as gross income on Page 1 of his Form 1040 and claim a charitable deduction on Schedule A. The $4,263 distribution would increase his Adjusted Gross Income (AGI) and could, as a result, increase the taxable portion of his Social Security or Railroad Retirement benefits by as much as $3,624, reduce his medical and miscellaneous itemized deductions by up to $405 and reduce or eliminate a number of other deductions and credits that are affected by AGI.
Now the $5,000 IRA transfer is tax-free and does not increase his AGI. Plus the additional $737 represents a tax-free withdrawal from his IRA.
Many retired taxpayers who must take required minimum distributions from an IRA are not able to itemize, due to the additional standard deduction for age 65 or older and the fact that their mortgage is paid off, and therefore get no, or only partial, tax benefit from their charitable contributions. By using a direct transfer to the charity of their choice to satisfy their annual required minimum distribution they will be able to get the full tax benefit for their contribution.
Charitable transfers should only be made from a "traditional" IRA. Because qualified distributions from a ROTH IRA are totally tax-free both to the owner as well as his or her beneficiaries there is no tax benefit in a direct transfer of funds from a Roth IRA to a charity.
In such a case it would be "more better" to take a distribution from the ROTH and make a cash contribution to the charity. The Roth distribution is not included in taxable income, and the contribution can be claimed as a deduction on Schedule A.