“Besides benefiting the charity, you may save a bundle on income taxes, as well as stay below the income cutoff for some other taxes and charges.”
At 70 ½, you need to begin taking required minimum distributions from your retirement accounts.
You can make a tax-free transfer from an IRA to charity and have that count as the RMD. However, you may question the advantage of doing that versus withdrawing the money and making a charitable donation on your own. If you itemize deductions, doesn’t it have the same effect?
According to a recent Kiplinger article, “The Advantages of a Tax-Free Transfer From an IRA to Charity,” if you itemize, the tax deduction will appear to be identical. That is, at first glance.
However, the transfer is deemed to be a qualified charitable distribution, which keeps your required minimum distribution outside of your adjusted gross income. This can help you remain under the income cut-off for some other taxes and charges. In addition, for those who don't itemize their deductions, making the tax-free transfer can benefit from their charitable gift.
If you are required to take large RMDs from your retirement savings, you could be lifted into a higher premium level for Medicare. However, making a tax-free transfer of that RMD to charity keeps that sum from the Medicare premiums calculation. If your AGI plus tax-exempt interest income is more than $85,000 for singles or $170,000 if married filing jointly, you'll have to pay higher Medicare Part B premiums. That could be a substantial difference: the monthly premiums are about $109 per month for most people who have their premiums deducted from their Social Security payments or $134 for new Medicare enrollees. Those subject to the high-income surcharge must pay from $187 to $428 per month for Medicare Part B in 2017, depending on their income—plus an extra $13 to $76 added to their premiums for their Part D prescription-drug coverage.
A lower AGI can also help you lower taxes on your Social Security benefits. You need to look at your provisional income, which is your adjusted gross income, not counting Social Security benefits, plus nontaxable interest and half of your Social Security benefits. If your "provisional income" is less than $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.
If you’re single and your provisional income is between $25,000 and $34,000—or between $32,000 and $44,000 if married filing jointly—up to 50% of your benefits may be taxable. If it’s more than $34,000 if single or more than $44,000 if married filing jointly, 85% of your Social Security benefits could be taxable. Keeping your RMD out of your AGI can help reduce your provisional income.
Remember: if you're over 70 ½, you can transfer up to $100,000 tax-free from your IRA to a charity annually. However, the funds must be transferred directly from your IRA to the charity to stay out of your AGI.
Reference: Kiplinger (May 12, 2017) “The Advantages of a Tax-Free Transfer From an IRA to Charity”