Value of Charitable Gifting from an IRA Under the New Tax Law
In late 2017, Congress passed the new tax law that contained numerous changes to the then existing law. One provision that was not changed was the ability for individuals over age 70 ½ to make charitable donations directly from their IRA, also known as a “Qualified Charitable Distribution (QCD)”.
Due to the tax law changes, QCDs have potentially become more valuable. The reason? Starting in 2018, the standard deduction has doubled to $13,600 for single filers and $26,600 for married filers*.
In addition, some itemized deductions are limited/eliminated going forward, such as the $10,000 cap on state and local taxes and the elimination of miscellaneous itemized deductions. These changes will result in far more individuals electing the standard deduction instead of itemizing deductions (which is where charitable deductions are claimed).
As a quick example, assume John and Sarah have an adjusted gross income of $100,000, and itemized deductions of $15,000 of state income taxes, $7,000 of home mortgage interest, $5,000 of charitable donations, and $5,000 of miscellaneous deductions.
In 2017, John and Sarah would have elected to itemize their deductions, with a total of $32,000 of itemized deductions, instead of taking the standard deduction of $15,200**. However, in 2018 they would elect the standard deduction of $26,600 instead of claiming total itemized deductions of $22,000 ($10,000 of state income taxes, $7,000 of home mortgage interest, and $5,000 of charitable donations), yielding a taxable income of $73,400.
If John and Sarah are over age 70 ½, they can make their donations directly from their IRA via a QCD (money goes directly from their IRA to the charity). In this example, the $5,000 distribution from their IRA is not reported as a taxable distribution to them (lowering their adjusted gross income by $5,000). They would still elect the standard deduction of $26,600 vs. itemized deductions of $17,000 ($10,000 of state income taxes, $7,000 of home mortgage, $0 charitable deduction since the QCD was excluded from their income), which would give them a taxable income of $68,400. This strategy is estimated to save $600 in Federal taxes***.
An additional benefit of QCDs is that they count for purposes of satisfying Required Minimum Distributions (RMD). You can read more about other potential benefits of a QCD in an earlier post here: http://www.verusfp.com/news-resources/2017/09/01/charitable-gifting-ira/.
As always, reach out to us if you would like to learn more about how a QCD may benefit your tax situation.
*The standard deduction in 2018 is $12,000 for single filers and $24,000 for married filing joint filers under age 65. The standard deduction is increased by $1,600 to $13,300 for single filers over age 65, and by $1,300 for each taxpayer over age 65 for married filing joint filers. Assuming both married filers are over age 65 adds $2,600 to the married filing joint standard deduction, bringing it to $26,600.
** The standard deduction in 2017 was $6,350 for single filers and $12,700 for married filing joint filers under age 65. The standard deduction was increased by $1,550 to $7,900 for single filers over age 65, and by $1,250 for each taxpayer over age 65 for married filing joint filers. Assuming both married filers are over age 65 adds $2,500 to the married filing joint standard deduction, bringing it to $15,200.
***This example assumes that all taxable income was taxed as ordinary income.