As we enter a new era with the recently enacted tax law, our firm is constantly reviewing the tax code and formulating new tax planning strategies for our clients. On its surface, the tax reform offers reduced tax rates and wider brackets. For many Americans, that will translate to a lower tax liability. However, the law also made meaningful changes to the standard deductions and imposed limitations on certain itemized deductions.
One of the more common deductions is donations made to charities. To benefit from a tax deduction, the tax filer(s) need to itemize their deductions. For tax year 2018, this means a married couple will need more than $24,000 in deductions to receive a tax benefit for a charitable donation. If you are taking the standard deduction, there is still hope.
If you have a Traditional IRA and are over age 70.5, consider making a Qualified Charitable Distribution (QCD) directly from your IRA. When the QCD direct transfer is made, the QCD satisfies the required minimum distribution, however is not included as taxable income on your return. This means that the taxpayer is able to get the benefits that come with making a charitable contribution regardless of whether or not they choose to itemize their deductions. Although total annual QCDs from all IRAs cannot exceed $100,000 for an individual, a spouse who also qualifies may donate up to $100,000, for a combined total of $200,000!
By excluding the QCD amount from your income, you receive a superior tax benefit than if you had taken a deduction as it decreases the income amount, allowing for more AGI-based tax benefits, which results in a lower tax. For example, a lower AGI may mean a lower tax bracket, less taxation on Social Security benefits, no Medicare surcharge, and 0% capital gains tax.
Here is how you would qualify:
- You must have a Traditional IRA
- You must be over age 70.5
- You have discretionary income and are looking for a tax deduction
- When you take your Required Minimum Distribution (RMD), you can elect to have a portion sent directly to a charity of your choice
- We will help you complete the IRA Distribution form for each charitable donation
TD Ameritrade will send the distribution directly to the charity on your behalf. You also have the option of making it an anonymous donation.
Here is an example of how a married couple, both age 72 and making $10,000 in total donations, may benefit:
| Without a QCD | Making a QCD | ||
| Income: $110,000 | Income: $110,000 | ||
| Donations: $10,000 | Qualified Charitable Distribution: $10,000 | ||
| Standard Deduction: $26,600 | Standard Deduction: $26,600 | ||
| Taxable Income: $83,400 | Taxable Income: $73,400 | ||
| Tax Liability: $10,227 | Tax Liability: $8,427 | ||
| Tax savings from the donation: $0 | Tax savings from the donation: $1,800 |
As you can see, by using the Qualified Charitable Distribution, the client was able to save $1,800 in taxes even though they took the standard deduction. Helping clients mitigate their taxes has always been a priority for us. If you qualify, this is a great opportunity to reduce your tax liability and still make a charitable impact with your donations.
Looking for more advice on tax-efficient donation strategies? Read Jim McGinty’s article about Donor Advised Funds here.
Photo Credit: Eric Ward
