family of four reading a book around a christmas tree

How Can I Give More to My Loved Ones and Less to the IRS?

“It’s the holiday season! How can I give more to my loved ones and give less to the IRS?”

I could not agree more! Let’s learn from 2 of my friends (hypothetical Mike and Donna). These examples apply to people who are still working and those already enjoying retirement.

Solutions for High-Income Earners

Donna is 63 and earns a substantial income. Mike, on the other hand, is 71 and retired. Because Mike holds an IRA (with a large balance), he is required to take $100k in required minimum distributions (RMDs) each year and report that amount as taxable income.  This RMD can bump them up to a higher marginal tax bracket. Even though they don’t need the extra income, Mike must take the RMD or pay a substantial penalty.

Mike can make a Qualified Charitable Distribution (QCD)that potentially might lower their reported taxable income. As long as they stay below the IRS limits, this charitable gift satisfies Mike’s RMD and does not count as taxable income. This allows Mike and Donna to stay within their preferred lower tax brackets while doing good for their community.

If you don’t need the extra income and RMDs are pushing your income into a higher tax bracket, consider making a Qualified Charitable Distribution with all or a portion of the RMDs.

Ideas for Complex Tax Situations

Mike and Donna are high-income earners and have a complex tax situation. They are negatively impacted by new tax law changes, which limits their ability to achieve a tax reduction through itemizing their deductions.

Mike and Donna face a dilemma. They could donate to charity to balance out their tax benefits. But they are not ready to give away a large sum of money all at once.

A donor-advised fund might be a viable option. Mike and Donna can open a fund to optimize their tax deductions.  They can also direct how, when, and to whom their gift is distributed.

Keep What’s Yours

Mike is happily retired. He decided to roll his 401(k) and two IRAs into one retirement account to simplify his life. In November, Mike checked the remaining balance for RMDs on his newly consolidated account and took the distribution listed Yet he did not take enough in RMDs.

Mike just made a costly mistake, and the IRS will penalize him for it. He miscalculated his RMD’s because he neglected to add the RMD amounts listed on his other accounts.

This is a subtle but common mistake. It will cost him a 50% penalty on the remaining balance of the RMDs he didn’t take. Remember RMDs cannot be rolled over into the next year.

Would you want to pay an extra 50% penalty instead of spending it yourself?


Let Us Help You to Enjoy Your Holidays

Some of these options can be complicated and overwhelming. We would love to help you simplify your life.

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