Americans in 2018 gave more than $410 billion to charity. That was after the passage in Dec. 2017 of the Tax Cuts and Jobs Act, which raised the standard deductions to levels at which it is expected fewer taxpayers will choose to itemize, affecting charitable contributions.
However, there are ways under the TCJA to reduce your tax liability beyond the standard deductions – particularly if you have an IRA and have reached the age of 70 ½, the point at which you must make a required minimum distribution (RMD).
Under the TCJA, standard deductions were increased to $12,000 for individuals; $18,000 for heads of households; and $24,000 for married couples filing jointly. Less itemizing, fewer charitable contributions. At least, that’s the thinking. However, the older you become, the greater the incentive to make tax-advantageous charitable contributions.
There are reasons charities are on edge. Charitable giving projections for 2018 suggest a downturn, according to The Wharton School, the University of Pennsylvania’s business school.
A July 20, 2018, Wharton School tax policy blog post said, “…we estimate that the TCJA will cause total charitable contributions to fall by about $22 billion in 2018." This reduction represents a 5.1% reduction in total charitable giving, and a 9.6% reduction in charitable giving reported on individual tax returns. This estimate does not account for the “income elasticity” of charitable giving, which recognizes that some tax filers might give more to charity because they feel richer after the tax cut,”
Comparing such projections with the 5.2% charitable giving increase between 2016 and 2017, and it’s clear why charities might be nervous: they want to see these figures go up, not down. This is why charities are likely to start focusing fundraising attention on older taxpayers.
A person more than 70 ½ (at the time of a charitable donation) should be familiar with yet another acronym: QCD, or qualified charitable distribution. A QCD enables anyone over 70 ½ to donate up to $100,000 from their IRA to a public charity - without negative tax consequences. The donated amount isn’t counted as taxable income. IRA holders at 70 ½ must make a RMD from their IRA. The QCD can meet some, or all, of that legal obligation.
The catch, which isn’t much of a catch, is that the contribution must go directly to the qualifying charity from your IRA account. It’s not legal to transfer the money to a secondary location (a bank account or brokerage account, for example), and then write a check to the charity. Out of the IRA and into the charity, and nothing else.
Another catch, which actually is a catch, is that if an employer is still paying you a salary or wages, you can’t use the QCD from a SIMPLE or SEP IRA. It can, however, be distributed from a Roth IRA – but there are no beneficial tax implications. Inherited IRAs are wide open for use of the QCD as long as the donation is untainted by touching a third party, the charities are qualifying 50% charities under IRS rules, and not a donor advised fund (a donor advised fund allows for an immediate tax deduction, and then suggest grants to be made from the fund in the future).
More than a year after its passage even the IRS is still determining how the law’s provisions affect tax obligations and liability. Whatever your situation, find a qualified tax professional and explore your options.
It’s worth money.
This article was originally published in the Knoxville News Sentinel.