Can donating to a Charity reduce your Medicare Costs?
The answer to that question is yes, and yet few high-income retirees over the age of 70-1/2 are taking advantage of this tax strategy. The strategy is called the Qualified Charitable Distribution. But before we get to that we must first understand the nature of Medicare and the associated Income Related Monthly Adjusted Amounts (IRMAA). These income brackets are cliff brackets which means if you go over the respective income bracket by a single cent you are in the next bracket. Below are the 2019 Income Related Monthly Adjusted Amounts (IRMAA). Also, the Part D Prescription drug component of Medicare is subject to an Income Related Monthly Adjusted Amount (IRMAA).
According to the Internal Revenue Tax Code under Publication 590, the Qualified Charitable Distribution stipulates the following:
A Qualified Charitable Distribution (QCD) generally is a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an IRS recognized charitable organization in order to receive the tax-deductible contributions. You must be at least age 70½ when the distribution was made. Also, you must receive a written acknowledgment of your contribution from the qualified charitable organization.
Each individual’s maximum annual exclusion for QCDs is $100,000. If you file a joint return, your spouse also can have a QCD and exclude up to $100,000. Any QCD above the $100,000 exclusion limit is included in income on the IRA, Pensions and Annuities line of the tax return. The amount of the QCD is limited to the amount of the distribution that would have been included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of the taxable income.
In addition to helping to reduce potential Medicare Costs the Qualified Charitable Distribution can help with those who are no longer able to Itemize on a Schedule A due to the SALT limitations of $10,000 and the higher Standard Deductions:
As a result of these changes, many Charitable organizations have seen their revenue decline. The Qualified Charitable Distribution is an above the line deduction and reduces the amount of the IRA that is taxable; it reduces the amount of the Modified Adjusted Gross Income. Therefore, a high-income retiree who is over 70-1/2 and could potentially go into the next Income Related Monthly Adjusted Amount (IRMAA) bracket based on income could then direct a part of their Required Minimum Distribution from their IRA toward a charity of their choice. High income and high net worth couples could donate upwards of $200,000 per year thereby reducing both their tax exposure and any related increased cost due to the Medicare Income-Related Monthly Adjusted Amount (IRMAA).
See example below:
The previous example decreases the donor’s Modified Gross Income from $195,000 to $95,000. This donation would result in an annual cost savings due to Medicare’s Income-Related Monthly Adjusted Amount (IRMAA) of $4,425.60 for a single person and annual cost savings of $798.00 for a couple. Using the Standard Deduction for individuals over 65, the potential tax savings would be $15,000 for a single person and $17,079 for a couple. The tax savings will be dependent upon each individual’s or couple’s own circumstances.
More importantly, smaller donations can be made if the individual or couple is nearing the Medicare Income-Related Monthly Adjusted Amount (IRMAA). Although this may not have a significant impact on their tax exposure it has the potential to mitigate increasing Medicare costs which is essentially a stealth tax in their plan.
This type of tax-strategy benefits the donor and more importantly benefits a Charity to give back value to our society. By donating to a charity through your Required Minimum Distributions, you can potentially reduce your tax bracket and your healthcare costs while improving your overall wellbeing by giving to causes that motivate your heart and soul.
Theresa J. Yarosh, CFP®, CLU®, ChFC® is the Founder and President of Macro Wealth Management, LLC. She has been in the financial services industry for over 20 years. She is considered to be on the leading edge of financial planning as it pertains to the impact of healthcare costs in retirement. This specialization has given her the focus to identify what financial products in a retirement plan result in higher healthcare costs versus what financial products do not. This allows for a plan that seeks to contain and reduce ongoing healthcare costs to restore the purchasing power of retirement assets.
She is also the Founder and President of Main Street Medigap, LLC. Main Street Medigap, LLC provides Medicare Supplement Insurance policies to seniors ages 65 and over. Also, Main Street Medigap, LLC also consults Attorneys. Banks, CPAs and other Financial Advisors on Medicare and its related cost structure.
She can be reached at email@example.com
Kim Forrester CPA/CGMA is a partner at Levine, Jacobs & Company, LLC in Livingston, NJ. She has practiced accounting for over 30 years. Kim specializes in audits and completion of tax returns (990) for non-profits and provides accounting and tax services for owners of businesses that are in the medical, retail, personal services and funeral homes.
She can be reached at firstname.lastname@example.org
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.
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