Updated June 18th, 2021
By: Brandi Graham, CTFA, CFP®, Senior Advisor
If you make gifts to charity and are required to take a required minimum distribution (RMD) from your individual retirement account (IRA), you may be able to reduce your Medicare premium.
If you’re wondering what Medicare premiums and charitable giving have to do with one another, consider this:
- Most people will pay $148.50 per month for Medicare Part B; however, for those with incomes over $88,000 for single filers and $176,000 for joint returns, the monthly premium could be $207.90 to as much as $504.90 per person per month.
- The Income Related Monthly Adjustment Amount (IRMAA) is based on modified adjusted gross income (MAGI) reported on your tax return from two years prior. Your 2019 tax information will determine what your 2021 IRMAA is.
- Instead of withdrawing your RMD and writing a check to charity, you can complete a Qualified Charitable Distribution (QCD). All or a portion of your RMD will by-pass you and go directly to charity.
- By electing a QCD, the RMD will not be included in your taxable income, thereby, reducing your MAGI for Medicare purposes.
In this scenario, you are able to take the money out of your IRA tax-free; it is excluded from income altogether. If you were to take the money from your RMD and then write a check to charity, you would take the charitable deduction on schedule A, but the RMD would be included in your MAGI. MAGI will determine how much you pay for Medicare and additional costs for part D coverage. Therefore, by lowering your MAGI, you could lower your Medicare premium.
Even if you are not subject to the increased Medicare premiums, you may still benefit from completing a QCD. Social security income can be taxable up to 85% of the amount received depending on your MAGI. If you can reduce your MAGI with a QCD, you may be able to reduce the amount of your social security income subjected to income tax.
If you do not have enough deductions to exceed the standard deduction you lose the benefit of itemizing your charitable deductions.
Higher standard deductions make itemizing deductions on schedule A unnecessary. Other than a nominal above the line $300 charitable deduction, charitable contributions would no longer have an impact on the tax you pay. However, if you utilize the QCD, you may also gain an additional tax benefit. You benefit from the standard deduction and do not pay any tax on the RMD.
Naturally, there are some specific conditions that must be met and restrictions that do apply. Your Advisor can walk you through the ins and outs of utilizing a QCD and whether doing so would be a benefit for you. As always, if you have any questions about your own circumstances, please do not hesitate to reach out. We are happy to help!
Brandi B. Graham is a Senior Advisor with John G. Ullman & Associates, Inc. She is a Certified Financial Planner TM and a Certified Trust and Fiduciary Advisor.