Those over the age of 70 ½ who have a Required Minimum Distribution (RMD) may be able to take advantage of a giving strategy that has taken on more significance following the recent passage of the Tax Cuts and Jobs Act (TCJA).
When preparing a tax return, filers take the higher of either the Standard Deduction or Itemized Deductions. One of the big changes in the TCJA is a near doubling of the Standard Deduction to $12,000 for single filers and $24,000 for those married filing jointly. With this increase, it’s anticipated that many taxpayers who had itemized deductions in 2017 will begin to take the Standard Deduction in 2018 and beyond.
If you find yourself in this position, don’t fret. It’s a good thing to have higher deductions! However, if you are one who makes charitable contributions and you’re no longer itemizing your deductions, you won’t be deducting those charitable contributions, as you would need to itemize to do so.
A strategy to enable you to continue to get a tax benefit associated with charitable giving is to make a Qualified Charitable Distribution (QCD) from your IRA. A QCD is a gift directly to charity from your IRA. Those over the age of 70 ½ may make a QCD of up to $100,000 per year and avoid the taxable income normally associated with an IRA distribution. Better yet, a QCD counts toward satisfying your RMD.
If you historically have taken your RMD as taxable income and made any contributions to charity and deducted such gift, you may be able to achieve the same (if not a better) tax outcome by making a QCD. For example, if Joe had been giving $10,000 per year to charity and deducting this as an itemized deduction, but will now be taking the Standard Deduction, he can choose to make a $10,000 QCD from his IRA, avoiding the taxable income on such distribution. It can be argued that this has the same tax impact as taking the Standard Deduction and deducting the $10,000 charitable contribution, as Joe avoids this taxable income on such a distribution on his way to satisfying his RMD.
As you have an opportunity to talk with your tax preparer about your particular situation, we encourage you to ask whether a QCD is a good fit for your charitable giving. We would be happy to talk with you about this, or other charitable giving strategies, or answer any questions you may have pertaining to charitable giving and your financial situation.