Transcripts

Kevin McCormally's Tax Tips-The IRA Donation

SUSIE GHARIB: The calendar may say December, but we're thinking April, as in the mid-April deadline to file your Federal income taxes. Now is the time to look over your finances and find ways to keep more of your own cash. So this week, we have a special series of year-end tax tips. Tonight our tax expert, Kevin McCormally, editorial director of "Kiplinger's Personal Finance," says you can help yourself by using your IRA to help others.

KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER'S PERSONAL FINANCE": This year, I want to focus my year-end tips on the generosity of NIGHTLY BUSINESS REPORT viewers and how to make sure some of that good karma bounces back to you in the form of tax savings. First, there's a brand new rule this year for taxpayers who must take money out of their IRAs because they are age 70.5 or older. Even if you're a lot younger, this could be very important to your parents or grandparents.

Qualifying taxpayers can donate up to $100,000 of IRA money directly to charity. You don't get a deduction, but the payout doesn't count as income, either. That might sound like a wash, but it's really a lot better. The majority of taxpayers don't itemize deductions, so they don't get a break for donating to charity anyway. A direct IRA contribution saves them money because they don't have to pay tax on the funds coming out of their IRAs. Even if you can offset an IRA payout with a charitable deduction, you can still lose. For lower income taxpayers, reporting income from an IRA can result in more Social Security benefits being taxed. And for higher incomers, an IRA payout can dilute the tax-saving power of deductions and exemptions or even drive up your Medicare premiums.

So, if you have to take a payout from an IRA before the end of the year and you're planning a substantial charitable contribution, consider having the money shipped directly from your IRA to the charity. Now what if the planned gift is more than the amount of your required minimum distribution, but less than the $100,000 limit for direct donations? You're probably better off having the RMD go directly to charity and then making the rest of your gift from other funds. Assuming you itemize, the second part of your gift will earn you a tax-saving deduction. I'm Kevin McCormally.