The Tax Cuts and Jobs Act passed on December 22, 2017 was the biggest rewrite of the tax code since 1986 and made sweeping changes to the individual and corporate tax system. While most taxpayers will benefit from the reduced tax rates and increased standard deductions, others may find they can no longer take advantage of certain itemized deductions on their 2018 tax return.
As the 2017 tax return season winds down, now is a great time to start thinking about how you can take advantage of tax reform, especially if you already receive or plan to start taking required minimum distributions from your retirement accounts in 2018.
Impact of the Tax Cuts and Jobs Act on Charitable Giving
The Tax Policy Center estimates the Tax Cuts and Jobs Act will shrink the number of households claiming charitable contributions as itemized deductions from about 37 million households to roughly 16 million total households in 2018. One significant reason for this is the Tax Cuts and Jobs Act nearly doubled the standard deduction for individual and married filers, up to $12,000 for an individual taxpayer and $24,000 if you’re married filing jointly. The increased standard deduction means fewer taxpayers will itemize their deductions on their 2018 tax return, opting instead to take the standard deduction if the total of their itemized deductions is less than the increased standard deduction.
However, if you have an IRA, will be at least 70 ½ in 2018 and are charitable inclined, opting to use a qualified charitable distribution could potentially save you hundreds or thousands of dollars on your 2018 tax return. A qualified charitable distribution (QCD) is generally a nontaxable distribution from an IRA owned by an individual who is age 70 ½ or over that is paid directly from the IRA to a qualified charity. A QCD cannot exceed $100,000 per year but the amount of the QCD counts toward your required minimum distribution requirements from your IRA.
A QCD from an IRA has several benefits to taxpayers and the charities receiving the distribution, including:
- Amount of QCD has never been taxed (supercharged charitable gift)
- Charity does not pay income tax on the distribution it receives
- Exclude the amount of the QCD from adjusted gross income (AGI) and modified adjusted gross income (MAGI)
- Reducing AGI and MAGI for those with higher incomes may help limit exposure to the Medicare surtax of 3.8% over the threshold income levels
- Using a QCD may reduce MAGI enough to keep an individual out of the Medicare surcharge range, thereby decreasing Medicare premiums
- Reducing MAGI could potentially lower or eliminate the taxation of social security benefits, which can be taxed if MAGI is above certain thresholds
Consider the following example:
A 72-year old retired couple who will now take the standard deduction under the Tax Cuts and Jobs Act, have total combined annual RMD’s of $30,000, who typically give $500 per month to their church and another $500 per month to their favorite charity, can instead direct $6,000 to their church and $6,000 to their favorite charity as a QCD, thereby reducing their taxable income by $12,000. If the couple is in the 24% tax bracket, this strategy could save the couple $2,880 in federal taxes alone. Additionally, by utilizing a QCD and reducing their MAGI, they may be able to save on Medicare premiums and avoid the inclusion of their social security income from taxation.
As you can see, a QCD can be very appealing for those with charitable inclinations who do not need to rely on their full RMD to meet their annual spending needs.
To determine if a qualified charitable distribution is right for you, talk to your Advisor and start planning for your 2018 tax return today!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
CWM, LLC does not provide tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.