Gift-Planning Blog

IRA Rollover Can Reduce Tax on Social Security Benefits

Posted June 2017

Many donors are aware of the attractive benefits of the IRA charitable rollover—but one advantage that is not widely known is that it can reduce the portion of your Social Security benefits that is subject to federal income tax.

If you are 70½ or older, the rollover allows you to transfer up to $100,000 directly from your IRA to charity each year without the amount transferred being treated as a taxable distribution to you. One of the most powerful aspects of the IRA rollover is the fact that amounts sent directly to us count toward the minimum amount that you are required to take as a distribution once you reach age 70½.

Now a permanent part of tax law, the rollover can be a real boon to you if any of the following circumstances apply: you do not itemize deductions; you regularly give more to charity than the maximum amount that can be deducted in any one year; or your state does not provide for an itemized deduction for state income tax.

Taxable income reduced by more than $20,000:

Here is a description of a circumstance in which a couple uses the IRA charitable rollover to significantly reduce their taxable income.

Example: Let’s say that Virginia, 71, and Bill, 69, are retired and receive $48,000 in Social Security benefits between them. Last year they had about $30,000 of other income from various sources and Virginia faced a required minimum distribution (RMD) from her IRA of $25,000.

As faithful donors supporting our mission, they decided before the end of the year to transfer the $25,000 to us via an IRA rollover to fund a special project in which they have keen interest. They chose this gift strategy even though they itemize on their federal return and live in a state with no income tax. Why? Because, among other reasons, it reduced the amount of their Social Security benefits subject to federal income tax.

The portion of Social Security benefits subject to tax is generally determined by the amount of other adjusted gross income (with some adjustments) and the amount of Social Security benefits the taxpayer receives. If Virginia and Bill had received the IRA distribution and then contributed it, they would have had $55,000 of “other income” ($25,000 from the IRA plus $30,000 from other sources) to consider in calculating the taxable portion of their Social Security benefits. That would have resulted in $35,750 of their $48,000 Social Security benefits being taxable.

But because the $25,000 came to us through an IRA rollover, it did not show up in their income. This means that only $30,000 of other income was considered in the calculation, resulting in just $14,500 of their benefits being subject to tax. Net reduction in taxable income: $21,250

The savings could be even greater if you live in a state that does not provide for itemized deductions of your charitable contributions. Moreover, if you do not itemize on your federal return, an IRA charitable rollover can transform what would have been a nondeductible contribution into one that is effectively deductible. How? By keeping the amount you transferred to charity from showing up in your income.

Reduction of Social Security benefits subject to tax is just one potential benefit of an IRA rollover. The degree to which you would benefit depends on your specific circumstances. If you have significant income other than Social Security benefits, you may realize only minimal or no reduction in the taxable portion.

If you are 70½ or older—or will be in the near future—we would welcome the opportunity to discuss how an IRA charitable rollover to support our work can work for you.

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