Ask Bob: Can a Qualified Charitable Distribution Reduce Taxable Income and Help Avoid IRMAA?

Our expert answers a Retirement Daily reader's question about QCDs.

Author:
Robert Powell, CFP
Publish date:
Jun 23, 2022

Question

Will a QCD (qualified charitable distribution) in excess of one’s RMD (required minimum distribution) amount help to reduce MAGI (modified adjusted gross income) for IRMAA (Medicare’s income-related monthly adjustment amount) purposes?

I think the answer is “no” because it is really only the unavoidable RMD amount that necessarily increases MAGI and triggers the IRMAA, so exceeding the RMD amount does not have the same benefit. However, to the extent that future RMDs are reduced as a result of a large QCD, it could potentially help to avoid IRMAA in future years. Do you agree?

Answer

Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®, Shakespeare Wealth Management, LLC, says a QCD in excess of your RMD won’t decrease your AGI (adjusted gross income)—although it won’t increase it either. “The income reduction benefit really comes from the ability not have to include on your return amounts you would otherwise be required to distribute,” he says.

“You make a good point that doing a larger QCD now will reduce your retirement account balance, which would also reduce future RMDs,” says Ellenbecker. If doing so drops your MAGI enough that you fall to a lower IRMAA tier, then it could save you money on Medicare premiums. He adds, “Remember that Medicare premiums are based on tax returns filed two years prior, so 2022 tax returns will drive 2024 Medicare premiums.”

“It could also create other tax consequences, like subjecting more of your Social Security to be taxed,” notes Ellenbecker, “reducing AGI-based deductions like medical expenses, or forcing your investment income to be subject to the 3.8% Medicare surtax.”

“With the standard deduction so high under current tax law, the vast majority of taxpayers do not itemize their deductions,” says Ellenbecker. Typically, the only way to get a tax benefit for charitable contributions is to itemize and because QCDs don’t require you to claim the expense as an itemized deduction, you are able to get a tax benefit regardless of your tax situation. “For many taxpayers over the age of 70 1/2,” Ellenbecker says, “a QCD is the most effective way to get a tax benefit for your charitable donations.”