Mike Szydlowski, Woodberry Forest financial aid director and independent tax preparer, returns to offer advice about financial and and private school contributions.
You may know that on January 1, 2013 several new taxes took effect. This note addresses a strategy that may help retirees avoid the new 3.8% Medicare surtax, also referred to as the Net Investment Income Tax (NIIT). This surtax applies to net investment income of single filers with Modified Adjusted Gross Income (MAGI) above $200,000 and of Married Filing Jointly (MFJ) filers with MAGI above $250,000. For those who file as Married Filing Separately the MAGI threshold drops $125,000.
MAGI is AGI plus tax free foreign earned income.
This 3.8% tax is due on the smaller of net investment income or the excess of MAGI over the above thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties, and passive rental income.
For those over age 70.5 with IRAs you know that you are subject to required minimum distribution (RMD) rules.
What if your RMD puts you above the MAGI thresholds for your filing status above?
One possibility to bring your income below MAGI thresholds is a ‘direct to charity’ IRA donation (up to $100,000).
If MFJ, then each spouse can make the direct to charity contribution of up to $100,000. So, if you are married and file jointly and if your RMD would put your MAGI above $250,000 you could avoid the 3.8% tax on investment income by directing the custodian of your IRA to make a contribution directly to a charity.
Assuming your transfer is at least as much as your RMD then you have met the RMD rules, avoided the Medicare surtax and helped your favorite charity. A ‘win-win-win’!