NCPA - National Center for Policy Analysis


April 5, 2007

Charitable gift funds offer a surprising advantage to retirees with ordinary incomes: a retired couple can increase their giving or increase the amount they spend on themselves.  Or they can do a bit of both, says financial columnist Scott Burns.

Suppose you are drawing Social Security benefits and covering additional expenses by making withdrawals from your Individual Retirement Account (IRA).  At year-end you withdraw $1,000 for a charitable donation.  What happens?

  • The charity gets your check for $1,000 but the withdrawal caused your taxable income to rise by $1,000 since taxes on regular IRAs are deferred until the funds are withdrawn. 
  • Unless other deductions total at least $10,700 -- the standard deduction for a married couple filing jointly for 2007 -- that $1,000 won't provide any tax benefit. 
  • Many middle-income retiree households don't have enough deductions to itemize; so your tax bill will increase by your marginal tax rate; for many retirees, that is 15 percent, or $150.

Increasing your income by $1,000 may also cause some of your Social Security benefits to be taxed.  This doesn't start at lofty incomes.

For example:

  • A couple with $36,000 in Social Security benefits can have only $14,000 of income from other sources before triggering Social Security benefit taxation.
  • The next $1,000 of income will cause $500 of benefits to be added to taxable income.  This will increase their income tax bill by $75, a total of $225.

It can get worse:

  • If this couple withdraws more than $26,000 from their IRA, each additional $1,000 withdrawal will trigger taxation of $850 in Social Security benefits. 
  • They will have to pay $150 on the additional $1,000 and $127.50 more on the $850 in Social Security benefits, a total of $277.50. 
  • Thus, giving $1,000 to charity can cause the retired couple to pay an additional $225, or more, in taxes to the federal government.

Source: Scott Burns, "A Wiser Way For Retirees to Donate," National Center for Policy Analysis, Brief Analysis, No. 584, April 4, 2007.

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