Q: This is the first year I will need to take money out of my IRA. We are in the fortunate position of not needing this money to meet expenses. We both have substantial pensions and receive decent dividends from some preferred stocks. Weve read about a new 3.8 percent tax linked to the new health care bill on people with high incomes, and wed prefer not to take any distribution. Is there any way around this? Could we gift our IRAs to our children or grandchildren since they are in a lower tax bracket?
IRA owners must take a required minimum distribution once they reach 70½. The first distribution can be made in the year in which you turn 70½ or by April 1 of the following year. If you delay your first RMD into following year, you will have to take out two RMDs that year, one before April 1 and the second before Dec. 31. Taking two RMDs in one year may place you in a higher tax bracket. If you dont take your RMDs on time, the IRS will impose a 50-percent penalty in addition to the normal income tax owed. You dont want to miss the deadline for your RMD. Gifting to your children and grandchildren is a nice thought, but you cant gift IRAs. You can gift the money taken from your IRAs, but you will still owe the income tax.
The American Taxpayer Relief Act of 2012 (ATRA) added a new 39.6-percent tax bracket for individuals with incomes above $400,000 ($450,000 for married filing jointly) plus a 20-percent top rate on dividends and long-term capital gains for taxpayers in that top bracket. Certain itemized deductions and personal exemptions are also reduced for those single filers with income over $250,000 ($300,000 for married filing jointly). The 3.8 percent is a Medicare surtax on net investment income for individuals with modified adjusted gross incomes above $200,000 ($250,000 for married couples). Net investment income includes interest, dividends, capital gains, rents, royalties, taxable distributions from nonqualified annuities and income from passive activities. Distributions from qualified retirement plans will not be included in the calculation of net investment income. Distributions will increase your MAGI and therefore could subject you to this tax. If you are subject to this tax, the taxable amount is the lesser of a) your net investment income, or b) the excess of your MAGI above $200,000 for singles; $250,000 for joint filers or $125,000 for spouses filing separately.
For 2013, you may want to consider making a charitable deduction from your IRA and have it count toward your RMD. This is allowed for 2013 as part of ATRA. You can make what is called a qualified charitable distribution. The distribution must be a transfer directly from an IRA to a qualified charity. The QCD will be excluded from your taxable income. If you take an IRA distribution and subsequently write a check to the charity, the distribution will be included in your taxable income even if the amounts distributed and donated are the same. IRA owners who have attained age 70½ are permitted to make QCDs of up to $100,000. You should discuss this with your financial or tax adviser.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624.