13 Jan Sending your Required Minimum Distribution (RMD) directly to charity

 Q. This year, as was also true for some years in the past, one can have some or all of their Required Minimum Distribution (RMD) directly sent to charities of their choice. My question: is it better to do that and avoid the income tax on the distribution or to take the distribution after payment of the taxes and then make donations to those same charities and take the tax deductions?

A. There’s a lot to consider before you decide.

On Dec. 19, 2014 President Obama signed the Tax Increase Prevention Act.

“This includes some big tax extenders for individuals — items that were set to expire at the end of 2013 which have been give a one-year extension, said Cynthia Fusillo, a certified public account with Lassus Wherley in New Providence.

“The provision to take a tax-free distribution from an individual retirement account that you refer to is one such extender,” she said. “This applies only to Required Minimum Distributions for folks over 70 ½.”

She said to make this work, you can direct for the custodian of your IRA to make a transfer with a maximum of $100,000, to a public charity or charities.

You then do not take the amount of this transfer into taxable income, and of course, then you do not get a charitable deduction for the transfer, Fusillo said.

“This may be beneficial, saving more tax dollars versus taking the distribution into taxable income and claiming an itemized deduction for a corresponding charitable deduction that you make outside of the IRA,” she said.

One example of when it could make sense is for taxpayers with very high income, so high that their overall itemized deductions are reduced and they perhaps also run into having their charitable contributions limited as well. She said a 50 percent limit applies to cash gifts to charities, meaning that all cash charitable donations cannot exceed 50 percent of your adjusted gross income.

“A different scenario when this could be tax advantageous is when your charitable deductions just put you over the threshold to itemize,” she said. “Directing that the transfer to charity be made directly out of your RMD would avoid tax on that distribution and then enable you to use the standard deduction.”

Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, agrees that paying the RMD directly to charity is the way to go.

First, though, make sure you don’t need the money to pay your own expenses.

If you don’t pay it directly from your RMD, Pallitto said, “You would report 100 percent of the income and only get a deduction equivalent to your tax bracket: 15 percent, 20 percent, 25 percent, etc.”

Before you make a move, speak to your tax advisor to make sure you choose the option best for you.

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This story was first posted in January 2015.