If you are age 70 or over, you are probably well aware of what we mean by an RMD.
That is a “Required Minimum Distribution” from retirement accounts. Calculated from an age based table, RMD is the annually increasing percentage of your retirement funds that must be withdrawn, and therefore taxed, each year. This only affects taxpayers after they have reached the age of 70½. The year that occurs is the first year an RMD comes into play. Fortunately, you have until April 15 of the following year to actually withdraw that first RMD. After that first year, you must execute an RMD for each calendar year before the end of the year.
As a rule, RMD’s are fully or partially taxable. In most cases, there is no way around that. To add insult to injury, many of the taxpayers that live in the RMD world have no home mortgage interest deduction as they have paid off their home mortgage. This often causes their charitable contributions and other deductions to fall near or below the annual standard deduction. Since most taxpayers are entitled to use the standard deduction, it can be said that the charitable contributions in this situation are “lost” or do not create any true tax savings.
If your deductions total less than the standard deduction after excluding your charitable contributions from the total, some amount of the contribution is not creating a tax benefit. If you could just subtract the contributions from your income before applying the deductions and calculating your tax, you could reduce your tax bill, therefore maximizing the savings derived from your benevolence. Sound too simple? Think it could never be true? Well as farfetched as it may sound, the current tax regulations do allow such an action. But hurry because currently, this action can only be used during 2011.
How it Works.
If you make the election to have your RMD distributed on your behalf directly to the qualified charity of your choice, you can avoid having that amount show up as taxable income at the year’s end. You also loose the coinciding contribution. But you will have matched the contribution with income, dollar for dollar and eliminated both from your tax returns. At the time of filing, your contributions may be lower, but you will still have the standard deduction. This action could make a big difference in your tax bill.
Does this make sense for you?
If you answer yes to all or most of the following, this may be a good fit for you.
- Are you required to take a 2011 RMD?
- Do you still need to withdraw your 2010 “1st year” RMD?
- Do you routinely make generous charitable contributions?
- Do you desire to minimize your 2011 taxes?
Remember a critical key factor in this potential tax break. The funds must be paid directly to the charity. Although you can have the check mailed to you, it must be payable to the charity, not you.
Please Note: This Blog is not intended, and cannot be relied upon, as tax advice. Each Taxpayer’s situation and ultimate results of exercising the potential tax break described above may vary. Consult with your professional tax advisor and retirement plan consultant prior to taking any action with your financial resources. Plan today and protect your wealth tomorrow.