Reduce Taxes on Your Social Security Benefits

Many older people benefit from making gifts directly from their individual retirement accounts (IRAs). Technically known as a qualified charitable distribution (QCD), this strategy is often informally referred to as an IRA charitable rollover.

When donors reach the age of 70½, they can make a gift from an IRA directly to a charitable organization without the amount of the distribution being treated as taxable income to the donor — effectively making the distribution a deductible gift. For donors who have reached the age when they must take a required minimum distribution (RMD) from qualified retirement plans, a gift directly from an IRA reduces the amount of the RMD that otherwise would be taxable income on a dollar-for-dollar basis up to a maximum of $100,000 per taxpayer per year.

These benefits are the headline grabbers, and rightfully so. There are, though, additional, often overlooked, benefits of IRA rollovers. A QCD may help donors avoid additional tax on their Social Security benefits. Here’s why: Up to 85 percent of Social Security benefits can be taxable, and the portion that is taxable is determined by the amount of other income the taxpayer has.

A distribution from a retirement plan to a taxpayer is generally taxable and gets added to other income in determining how much of a person’s Social Security benefits is subject to tax. Unless the recipient already pays the 85 percent maximum, more of the recipient’s Social Security benefits will be subject to tax — even if the recipient uses the distribution to make a charitable gift.

A QCD, however, goes directly to the charitable organization without being considered distributed to the taxpayer and, therefore, does not increase the portion of Social Security benefits that are taxable. If you intend to make charitable gifts and are old enough to make qualified charitable distributions, you will likely be well served by using QCDs to fund your philanthropic goals. Check with your financial adviser to determine your eligibility to make a QCD.

Learn more

Find gift-planning articles and advice.