Charitable Contributions After the Tax Cuts and Jobs Act

Donating to charity is usually a selfless act, but that good deed in many cases also translated to a tax deduction for those that itemized on their annual filings. However, since the TCJA nearly doubled the standard deduction, this may result in less taxpayers itemizing. If you are one of these people, there may still be a way to benefit from charitable contributions without itemizing.

The TCJA almost doubled the standard deduction for most taxpayers. As a result, fewer individuals will itemize their deductions. The cap on taxes that may be claimed as an itemized deduction has also been limited to $10,000 for joint filers. These factors will also result in fewer individuals receiving any tax benefit from their charitable contributions.

There is still a way for certain individuals who don’t itemize to benefit from their charitable contributions. Taxpayers who are at least 70.5 years old and receiving required minimum distributions from their IRA (but not SIMPLE IRAs or SEP-IRAs) may have up to $100,000 transferred directly from their IRA to a qualified charity. The amount transferred to the charity reduces the otherwise taxable IRA distribution. These transfers are referred to as Qualified Charitable Distributions (QCDs). QCDs effectively allow the taxpayer to deduct the charitable contribution since these amounts reduce the taxable IRA distribution.

Let’s look at an example.

This taxpayer is 72 years old and has a required minimum distribution of $12,000. He does not have enough to itemize deductions and has traditionally given $5,000 to his church. Also, assume he has a combined federal and state tax rate of 30%. If he directs $5,000 of his required $12,000 distribution to be paid directly to his church, he is only taxed on $7,000 of the IRA distribution. If the amount is not directly transferred, he has $12,000 of taxable IRA distributions with no offsetting charitable deduction. By taking advantage of a QCD, he has saved $1,500 ($5,000 x 30%).

All taxpayers at least 70.5 years old and taking required distributions from their IRA should consider using the QCD to make their charitable contributions. Please contact us if you would like to discuss the QCD and whether this method would benefit you.