Across My Desk: Social Security Taxes

If you're retired, here's a way that could save some Social Security taxes.

With gas now over $3 a gallon, gold heading for $800 and the holidays on their way, let's pause for a moment and not think about the other "r" word but consider charitable giving.

This is from Jeremy Welther, a Certified Financial Planner (CFP) in Morriston, New Jersey:

"Donating IRA distributions directly to charity can cut income and Social-Security taxes.

People 701/2 or older with an IRA, 401(k) or Keogh plan normally must take a required minimum distribution, or RMD, from their plan(s) annually. It counts as taxable income--with one exception.

Under a 2006 law, when you instruct your plan custodian to send all or part of your RMD directly to a charity as a charitable donation, that portion won't be included in your income. You must be 701/2 or older and can give up to $100,000.

This may cut your federal income tax even if you cannot itemize deductions and may even cut taxes on your Social Security benefits.

"For non-itemizers who want to give to charity it's a no-brainer because it's the only way they can reduce taxes by donating to charity," says Jeremy T. Welther, CFP, a financial advisor with Brinton Eaton Wealth Advisors in Morristown, N.J.

The maneuver lowers your adjusted gross income, which may be better than getting an itemized deduction. For instance, singles earning more than $34,000 and couples making more than $44,000 pay income tax on up to 85% of their Social Security benefits.* "If you're in this zone, donating your RMD directly may reduce or eliminate the taxable portion of your benefits, but a regular charitable deduction won't," he says.

Also, upper-income seniors are assured of getting full tax benefits by donating their RMD. In contrast, charitable contributions are partially phased out for couples who have AGI of $156,400 or more and have large itemized deductions.

Donating an RMD isn't always superior to making an ordinary charitable contribution. "You have to compute both methods to figure out what's best for you," he says. You have to choose one or the other: if you donate your RMD you can't also take a charitable deduction for it too. Unless Congress acts, 2007 will be the last year for this special deal.

Welther can also discuss all other issues raised by RMDs, including maintaining your asset allocation, checking to make sure the custodian figured the amount of the RMD correctly, penalties and tax and other considerations the first year you receive an RMD.

*Income is all your other income plus half of your Social Security benefits. The portion of the benefits above the $34,000 or $44,000 threshold is taxed, so a couple making $43,000 who directs their $4,000 RMD to charity wouldn't pay any tax on their benefits; otherwise, $3,000 of benefits would be taxed.

Jeremy Welther is a Certified Financial Planner (CFP) practitioner and holds the Accredited Investment Fiduciary (AIF) designation from the Center for Fiduciary.

Brinton Eaton Wealth Advisors is a leading fee-only financial-planning, tax-advisory, and investment-management firm in Morristown, N.J. Web: http://www.brintoneaton.com.