Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

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percentage of the donor’s AGI—so the potential reduction is increased by the plan distribution, which increases AGI. The phaseout begins at $250,000 of AGI for single taxpayers ($300,000 for married filing jointly). C. PEP for high-income taxpayers. The personal exemption deduction is phased out under a different Code section ( § 151(d) ) and schedule, again beginning at $250,000 of AGI for single taxpayers ($300,000 for married filing jointly). A retirement plan distribution, by increasing AGI, may cause loss of some or all of the taxpayer’s personal exemption. The charitable contribution does not offset this. D. Deduction decreases taxable income but not AGI. Because the distribution is included in the individual’s gross income, it may increase his taxes in other indirect ways that are not offset by the charitable deduction, because the distribution increases his adjusted gross income (AGI) and the charitable deduction does not decrease AGI. For example, the plan distribution could decrease his medical expense deduction (limited to expenses in excess of 7.5% or 10% of AGI; see § 213 ) and miscellaneous itemized deduction (limited to expenses in excess of 2% of AGI; see § 67 ); increase his Medicare premiums (42 U.S. Code §1395r(i) ); decrease his eligibility to contribute to a Roth IRA (see ¶ 5.3.04 ); increase his income countable as part of the “threshold” for determining how much of his net investment income is taxable ( § 1411 ); and/or increase the taxability of his Social Security benefits (see § 86 ). E. Split-interest gifts are only partially deductible. If the gift is made to a charitable remainder or lead trust, to a pooled income fund, or in the form of a charitable gift annuity, the amount of the deduction is only part of the total gift (since a portion of the gift is benefitting individuals), even though all of the plan distribution was includible in income. F. Penalty for pre-age 59½ distributions. If the participant is under age 59½ at the time of the distribution, there is a 10 percent penalty on the distribution unless an exception applies. § 72(t) ; see Chapter 9 . The charitable deduction has no effect on this penalty. See ¶ 7.7.03 for a lifetime charitable giving strategy for under-age-59½ individuals. This penalty does not apply to beneficiaries. § 72(t)(2)(A)(ii) ; ¶ 9.4.01 .

G. State income taxes. In a state that allows no charitable deduction in computing its income tax, the participant would pay state tax on the distribution but get no offsetting deduction.

H. Nonitemizers. An individual who uses the “standard deduction” rather than itemizing his deductions would see no income tax benefit from the charitable contribution.

Some drawbacks can be minimized by using smaller distributions and smaller gifts (see ¶ 7.7.02 – ¶ 7.7.03 ). Also, certain forms of distributions (see ¶ 7.7.04 – ¶ 7.7.06 ) are not subject to full normal income tax, and so may offer an opportunity for more tax-effective charitable giving.

Give your RMD to charity

A retirement plan participant generally must start taking required minimum distributions (RMDs) annually (except in 2009) from his IRAs and other plans after age 70½ (or after retirement