The 2017 tax law changes have made certain charitable giving techniques more valuable for you.  One of these techniques is to give charitable contributions directly from an Individual Retirement Account (IRA).

These contributions count toward your required minimum distribution (the amount you are required to withdraw from your IRA in a year).

Here is how it can work:  Assume Fred and Pearl are a married couple living in New Jersey.  They are both 75 years old.   They have $120,000 in distributions from IRAs, $20,000 of taxable interest income, and $85,000 of tax-exempt interest income.  Their property taxes are $25,000 (of which $10,000 is deductible) and they contribute $16,000 to charity, the bulk to their alma mater.

Their itemized deductions are as follows:

                  Taxes                                                   $ 10,000

                  Charity                                                    16,000

                           Total                                            $ 26,000

Their standard deduction for 2019 is $27,000.  Therefore, they would not itemize.  Their tax is computed thus:

                  IRA Distribution                                  $ 120,000

                  Interest                                                    20,000

                           Total                                          $ 140,000

 

                  Standard Deduction                               27,000

                  Taxable Income                                 $ 113,000

                           Tax                                          $   16,577

If Fred and Pearl give $16,000 to their alma mater out of their IRAs, the result is as follows:

                  IRA Distribution                                  $ 104,000

                  Interest                                                    20,000

                           Total                                          $ 124,000

 

                  Standard Deduction                               27,000

                  Taxable Income                                   $ 97,000

                           Tax                                             $ 13,057

They would benefit from a tax savings of $3,520 simply by making a charitable contribution from an IRA directly rather than from their checkbook.  Of course, higher income taxpayers will save even more money.  Moreover, use of this technique can decrease the amount of social security subject to income and can reduce the amount of Medicare tax owed for a future year.   Using the numbers from the above example, Fred and Pearl would, without distributing money to their college from their IRAs, have a Modified Adjusted Gross Income (MAGI) of $225,000, calculated as follows:

                  IRA Distributions                                $ 120,000

                  Taxable Interest Income                         20,000

                  Adjusted Gross Income                     $ 140,000

                  Tax Exempt Interest Income                  85,000

                           MAGI                                        $ 225,000

Under rules for 2019, Fred and Pearl would each pay an additional $135.40 per month in Part B premiums and an additional $31.90 per month in Part D premiums for a total additional annual payment of $4,015.20.

Paying the charitable contribution out of IRAs gives the following MAGI:

 

                  IRA Distributions                                $ 104,000

                  Taxable Interest Income                         20,000

                  Adjusted Gross Income                     $ 124,000

                  Tax Exempt Interest Income                  85,000

                           MAGI                                        $ 209,000

Under the rules for 2019, Fred and Pearl would each pay an additional $54.10 per month in Part B premiums and an additional $12.40 per month in part D premiums for a total additional annual payment of $1,596.  Making the contributions out of the IRA results in a Medicare savings of up to $2,419.20.

The total savings in this fact pattern that arise from changing the source of funds for a charitable contribution could be as high as $5,939.20.  Of course, other taxpayers may experience different savings.