The Tax Cut and Jobs Act of 2017 brought about two major changes that impact the way you incorporate tax deductions.
First, the standard deduction has doubled to $12,000 when filing individually (with an additional $1,600 for taxpayers age 65 or older) and $24,000 when married, filing jointly (with an additional $1,300 per each person age 65 or older when married filing jointly). Second, the itemized deduction for state and local taxes is limited to $10,000 per return, and $5,000 if married, filing separately.
Due to these changes, many taxpayers will choose the standard deduction because they will no longer benefit financially from itemizing their deductions. This means that if you’ve grown accustomed to receiving tax breaks for your charitable contributions, you’ll be disappointed. However, there is another option for some. If you’re over 70 ½ (at the time of your donation), there is a term that you should become familiar with: QCD, or qualified charitable distribution.
A QCD simply allows anyone over the age of 70 ½ that donates up to $100,000 per year to a public charity, to do so from their IRA without tax repercussions. To put it simply, the amount you donate directly from your IRA will not be counted as taxable income. In fact, depending on your charitable contribution, it can save you a significant amount of money. The QCD works to satisfy some (or all) of your required minimum distribution. In order to stay qualified, however, the money must be distributed directly to the charity of your choice from your IRA account. In other words, you cannot transfer the money from the IRA into your bank account, and then write a check to the charity.
Keep in mind that if you are still being actively paid by an employer, you cannot use a QCD from your SIMPLE IRA or SEP IRA. A QCD can come from a Roth IRA, but there is no financial benefit. However, if you’ve inherited an IRA, you can use a QCD for a tax advantage.
Charitable contributions are great ways to give to those less fortunate, while also being tax-savvy.