If you are over 70, making charitable gifts directly from you IRA may be your best tax move going forward.
The Tax Cuts and Jobs Act, passed in December 2017, made three major changes that may significantly affect charitable giving, especially for those over 70.
First, it increased the standard deduction to $24,000 for married couples who file jointly (up from $12,700). For individual filers or couples who file separately, the standard deduction is $12,000 (up from $6,350 for 2017).
Second, a limit of $10,000 was placed on the state and local tax deductions (aka, SALT deductions). This limit, coupled with the increase in the standard deduction will cause many tax payers to stop itemizing their deductions, which is required to take a charitable tax deduction.
The third change in the new tax code made a provision called the Qualified Charitable Distribution (QCD) permanent. The QCD allows individuals who must make Required Minimum Distributions (RMD) from their IRA to give the money directly to charity, up to $100,000 a year. Using the QCD, the donation from the IRA directly to a charity is not considered income for tax purposes and it is also not a tax deduction. So in effect, it becomes a zero tax event.
The benefit of giving to charity this way is twofold. First, since the amount given directly to charity is not considered income, you might avoid surcharges that kick in at particular income levels and stay under “phase-outs” which is the loss of deductions, if you itemize. Also, it is not considered income for the purposes of determining Medicare premiums or taxation of Social Security income. Secondly, and more importantly, since the tax benefit is not dependent on the tax deductibility, you do not have to itemize for the benefit. But even if you still itemize your taxes under the new tax rules, doing a QCD may be more advantageous when looking at your entire tax picture.
The simplest way to make a QCD is to write a check directly from the IRA account. Writing checks, especially for small donations, is simple and the most common way most people make these types of donations. Alternatively, most custodians have special forms you can complete for a QCD and they will send the money directly to the charity.
While every family’s situation is different, we believe that for those who can make a QCD, it is more beneficial than gifting with cash or a check from your bank account. The times when it may be better to not do a QCD is if you are itemizing already, and you are considering gifting appreciated securities or you desire to give an amount larger than your RMD and you need the tax deduction. However, even under such situations, the QCD may be a superior strategy when considering future tax years and/or wealth transfer strategies; all of which are beyond the scope of this article.
Here is an example of how this may work:
If you are not itemizing, you effectively lose the tax deduction of a charitable gift. If a charitable donation gives you enough deductions such that it makes sense to itemize, any amount of the gift that falls in the standard dedication range is lost.
If a couple has deductions of $10,000 – the maximum SALT deduction – they still have $14,000 of standard deduction to “use up” before they would consider itemizing. Even if they gave $20,000 to charity, only $6,000 of that donation would be providing a tax benefit relative to taking the standard deduction. By gifting the $20,000 directly from their IRA, rather than taking the $20,000 in taxable income due to the RMD, they receive the full benefit on the charitable gift.