When the federal tax law changed late last year, part of the concern raised by many was the potential impact of the law on charitable contributions. Specifically, would people still be inclined to give even if they are unable to deduct them from their income taxes? Do people give because they believe in the cause or because they simply want the tax deduction? For charitable organizations, colleges and universities and other groups, these are serious questions that could materially impact their mission. So, let’s walk through the potential deterrent to contributing and offer a solution for those over the age of 70 ½.
When completing your return, you have the choice of taking what’s called the standard deduction or itemizing deductions. Obviously, you deduct the larger amount. Under the new tax law that takes affect in 2018, the standard deduction for a married couple filing jointly doubles to $24,000. Plus, the law caps the deductions for state income and property taxes at $10,000. As a result, the only way to “receive credit” for your charitable contributions now is for them to total more than $14,000 in order for your total itemized deductions to exceed the new standard deduction of $24,000. Quick, raise your hand if you’re still reading this.
Yep, this is pretty awful stuff. So, here is a crisp explanation of how to receive a tax benefit from your charitable contributions if you are over the age of 70 ½:
As you probably know, we all must start taking what are called Required Minimum Distributions (RMDs) from Individual Retirement Accounts (IRAs) in the tax year in which we turn 70 ½. Those RMDs are subject to income tax. However, one can make Qualified Charitable Contributions (QCDs) by transferring up to $100,000 per year from an IRA directly to a qualified charity. This tax-savvy strategy offers the combined benefit of satisfying your annual RMD while lowering your taxable income, resulting in a lower tax bill to you.
Here’s how it works:
Let’s say you and your spouse are both over 70 ½ and your combined RMDs total $24,000. If you wish to contribute $10,000 to say, the Y and God’s Pantry, it will reduce your taxable income by that same $10,000 and now only $14,000 is subject to income tax. And, even better, you still get to claim the standard deduction of $24,000 (plus an additional $2550 because you’re both over the age of 65) So, assuming you’re in the 24% tax bracket, instead of paying income tax of $5760 on that $24,000 of RMD subject to income tax, you would pay just $3360 of tax on the new total of $14,000 of RMD income – a savings of $2400.
This strategy is the classic win-win. 1) You satisfy part, or all, of your annual Required Minimum Distribution; 2) You reduce your tax liability by the amount of your charitable contribution just like you used to; 3) You get to take advantage of the new doubled standard deduction; and, 4) You get the satisfaction of doing good for an organization you care about.
Moneywatch Advisors manages RMDs and QCDs and many other abbreviations for our clients – call us if we can help you.