As a result of changes made under the Tax Cuts and Jobs Act of 2017 (TCJA), it is predicted that the number of taxpayers itemizing deductions will fall by more than half for the 2018 tax year. Given that the standard deduction has nearly doubled, most individuals will benefit from the new deduction more than the savings achieved through itemized deductions.
Where does that leave charitable deductions? For many taxpayers, itemizing charitable contributions won’t yield any tax benefit. However, if you are age 70½ or older, you may be in luck.
If you are a senior taxpayer as defined above, and are receiving required minimum distributions (RMD) from your IRA(s), you can elect to make annual contributions to a charitable organization through a qualified charitable distribution (QCD) made directly from your IRA. All you need to do is reduce your RMD by the amount you wish to contribute.
As a reminder, taxpayers must take RMDs from their traditional IRAs by April 1 following the year they reach 70½ or risk a penalty tax equal to 50% of the excess of the amount that should have been withdrawn over the amount actually withdrawn. While the amount of each RMD is calculated separately for each IRA, the amounts of the IRAs may be totaled, and you may pay the aggregated RMD amount from one or more of the IRA accounts.
How QCDs Work
An annual exclusion from your gross income – not to exceed $100,000 – is available for otherwise taxable IRA distributions that are QCDs. The distribution can’t be claimed as a deduction on your return and isn’t subject to the general percentage limitations that apply for making charitable contributions. The distribution is made directly by the IRA trustee to a Code Sec. 170(b)(1)(A) charitable contribution with certain limitations. For example, you can’t make the distribution to a donor-advised fund.
Tax Benefit of QCDs
You can achieve significant tax savings for charitable contributions without the need to itemize your deductions. For example, for 2018, if total itemized deductions, including charitable deductions, won’t exceed $24,000 for joint filers ($12,000 for single filers), you will not want to itemize; but you can take advantage of a QCD instead. In fact, the higher your marginal tax bracket, the more tax dollars you can save. For example, if joint filers have $320,000 of non-RMD gross income and $40,000 of RMDs, making a $3,000 QCD and reducing IRA withdrawals by a like amount would save $960 in tax dollars.
If you choose to use this vehicle to reduce your tax bill, your first step would be to defer taking RMDs – or at least defer taking the entire amount – until near the end of the year when you know how much you wish to contribute to charity for that year. By waiting, you likely will have a better sense how much your RMD, adjustable gross income (AGI) and taxable income will be.
One note of caution: If the distribution is made directly to you and then rolled over to a charitable organization, you can’t exclude it from your gross income. As noted above, the QCD must be made directly by the IRA trustee to the charitable organization. There are also some instances when you can itemize deductions and take advantage of a QCD, such as if you have very high medical expenses. A qualified tax professional can best advise you about these exceptions.
Questions about how to take advantage of qualified charitable distributions or other tax matters. Contact the tax team at Goldin Peiser & Peiser at 972-818-5300 or Eric Olsen, GPP Tax Senior Manager directly at 214-635-2538.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.