July 18, 2018 | by James Behr Jr
The Tax Cuts and Jobs Act of 2017 that passed through the Senate and House of Representatives this past December will have a wide range of effects on taxpayers. The new tax law is nearly doubling the standard deduction to $12,000 for single filers, $18,000 for heads of households and $24,000 for married couples that file jointly. On top of this, taxpayers 65 and older can claim an extra standard deduction of $1,600 if filing single and $2,600 for married couples who are both at least 65 and filing jointly. With the increase in standard deduction and decrease in many itemized deductions, it will often be less beneficial to itemize deductions; however, there are still ways to benefit from charitable contributions, which have historically been itemized. For taxpayers over 70.5 who must take required minimum distributions each year, donating directly from your IRA account to charity will decrease your overall adjusted gross income as well as satisfy a percentage or all of your required minimum distribution. Without the benefits of itemizing deductions, it is important to understand how charitable
giving can still benefit you.
For those who currently itemize deductions, this new tax law increases the standard deduction but also places limits on the amount that can be deducted for State and Local Taxes (SALT). There are also limits on interest deductions for homeowners with a mortgage—both of which are itemized. Because of these new laws, the nonpartisan Tax Policy Center estimates that the number of taxpayers that itemize deductions will fall 75% for a total of 5% of all tax returns. Even if you continue to itemize deductions, it is likely that a direct gift of your RMD will prove more beneficial than donating non – appreciated assets, such as cash, to charities.
In the year that you turn 70.5, you must begin taking a Required Minimum Distribution (RMD) from each of your IRA accounts. You can gift your RMD or a portion of your RMD tax – free after you reach this age, which affords you the chance to take advantage of the change in tax code. For those who like to donate a part of their income to charity on an annual basis, you can donate the money tax – free directly through your IRA account and have this count as a portion of your RMD for the year. An individual can transfer up to $100,000 to qualified (501(c)(3)) charities tax – free each year — even if this is more than your RMD — and if you file a joint tax return, each person is able to transfer up to this amount.
As a result of the new tax code, less taxpayers will itemize deductions because it will not make sense to do so. However donating your RMD or a portion of it directly to a qualified charity will continue to benefit tax payers in two significant ways. First, you don’t need to itemize your deductions to get a tax benefit from any charitable RMD gifts which in turn saves you time and money. It simplifies the process for you as you can take the standardized deduction instead of following the tedious process of itemizing all contributions you have made throughout the year. Second, the direct contributions to charity serve to keep this money out of your adjusted gross income. If you were to take the money out directly and then gift it to charity, it would be factored into your adjusted gross income which could potentially place you into a higher tax bracket, make more of your social security benefits taxable, and increase your Medicare surcharge.
Taking a qualified charitable distribution is only available through IRAs and to individuals who have reached RMD age, yet these distributions both count toward your RMD requirement and reduce the taxable amount of your IRA distribution — resulting in lower overall tax liability. To see how this may affect you, let’s look at an example:
Under pre – 2018 tax code, a 72 – year old couple filing jointly has an Adjusted Gross Income of $80,000 and pays $2,456 in state income tax, $5,000 in property tax, and $10,000 in charitable gifts would typically itemize deductions. This couple’s total itemized deductions equal $17,456 while the standard deduction that they would receive would only be $12,700. Because itemized deductions are more than $4,500 greater than the standard deduction, there would be no reason not to itemize.
Under the new tax code, with taxable income, state income tax, property tax, and the charitable gift amount staying the same, the deduction for state and local taxes (both income and property combined) is capped at $10,000. The itemized deductions that this couple could receive stays at $17,456 while the standard deduction is now at $26,600. The new tax code makes the standard deduction much more attractive to the couple and they would take this standard deduction.
This example not only demonstrates how the standard deduction
is often larger than itemized deductions, but this doesn’t even factor in gifting the charitable contributions from your IRA. Gifting from your RMD would not only lower the itemized deductions, but it would serve to lower your adjusted gross income and provide even more benefits. Continuing with this example:
If this couple gifted the $10,000 donation to charity directly from their IRA, their adjusted gross income will decrease from $80,000 down to $70,000 which pushes them from the 22% federal tax bracket to the 12% federal tax bracket. This will save them $9,200 in federal income taxes and still allow them to take the standard deduction that has increased.
Making a QCD is as easy as contacting the charity of your choice to see who the check should be made payable to and then contacting us. We will guide you through the process to ensure that the QCD is handled properly. We even have the ability to issue a checkbook linked to your IRA account for the sole purpose of making QCD donations. Be sure to obtain the acknowledgement from the charity stating the amount of the donation after you send it and remember, it must be a charity that qualifies for a charitable income tax deduction of an individual.