The Congressional Joint Committee on Taxation estimates that almost 90% of taxpayers will use the standard deduction when they file their taxes this April 15th due to the increased standard deduction resulting from the Tax Cuts and Jobs Act of 2017. This leaves many concerned that they will no longer be able to get the tax benefit from charitable contributions, which are only counted when you itemize your deductions.
For taxpayers over age 70 taking Required Minimum Distributions (RMDs) from their IRAs, they can direct some or all of their RMD to a charity, called a Qualified Charitable Distribution (QCD), therefore reducing their tax liability from the donation, while still taking the full standard deduction.
Here’s an example of what that could look like:
Let’s say a person has $100,000 of annual income, of which, $15,000 is from the RMD from their IRAs. They typically donate $10,000 per year to charity. In 2018, they processed a $10,000 QCD to their state association of the Deaf and took the remaining $5000 of their RMD in cash.
Old tax law:
-$4050 personal exemption (no longer applies in 2018)
– $10,000 itemized deduction from charitable contributions
$85,950 taxable income
New tax law:
$90,000 income (the $10,000 QCD never gets reported to the IRS as income)
-$12,000 standard deduction
$78,000 taxable income
$7950 less taxable income to report
In order for the donated funds to be exempt from taxation, they must be distributed directly from the IRA custodian to the charity through a QCD. The IRA owner can not take receipt of the funds and then forward the donation on his/her own. Work with your financial advisor or IRA custodian to ensure the process is done in compliance with IRS rules. As always, consult with your tax advisor to see how your personal taxes will be affected by the new tax laws.