The Tax Cuts and Jobs Act (“TCJA”) almost doubled the Standard Deduction. Beginning in 2021, Single filers can claim $12,550, Head of Household $18,800 and Married Filing Jointly $25,100. Additionally, the maximum amount that can be deducted for state and local income tax is $10,000. Before this change, it was estimated that about 30% of taxpayers itemized their deductions. After this change it is estimated that about only 10% of taxpayers will itemize their deductions.
Individuals over age 70 ½ can exclude from income up to $100,000 a year in IRA distributions if it’s distributed directly to a qualified public charitable organization.
This is called a Qualified Charitable Distribution (“QCDs”). A qualified public charitable organization typically includes non-profit organizations recognized by the IRS under code section 501(c) (3). A 501(c) (3) organization is operated for religious, charitable or scientific purposes. Donors who make charitable contributions to these organizations with a check or by cash are normally allowed a federal income tax deduction. A qualified public charitable organization however doesn’t include contributions made to donor advised funds, private foundations and supporting organizations. Understand however, that there is no double benefit allowed. If an IRA distribution qualifies and an election is made to exclude it from income, then there is no charitable donation. A Qualified Charitable Distribution from an IRA counts towards the annual Required Minimum Distributions (“RMD”).
Why should you consider doing this? There are several reasons to consider this strategy.
• First, taxpayers who don’t itemize their deductions aren’t getting any income tax benefit from their charitable donations. Taxpayers can take either the standard deduction or itemize their deductions, whichever is larger. The major itemized deductions are for income and property taxes, mortgage interest and charitable donations. Making a qualified charitable distribution from an IRA avoids having this included in taxable income and taxing it.
• Second, for taxpayers who do itemize their deductions, they may be subject to limitations on their charitable deductions. The first limit is that cash donations are limited to 100% of AGI; appreciated property donations are generally limited to 50% of AGI. Any amounts over this can be carried forward and deducted over the next five years.
• Third, by making this election, AGI will be lower as this distribution isn’t included in income. This may increase the allowable amount of medical deductions as these deductions are limited as a percentage of AGI.
• Fourth, a qualified charitable distribution from an IRA reduces gross income and may be reducing the taxable portion of any social security income benefit.
• Fifth, some states’ income tax, like Connecticut, is based on AGI. Therefore, taxpayers making this election may also be reducing their state income tax.
Finally, by making this election, the amount that is donated is out of your estate. Taxpayers who are eligible for this strategy should take a hard look at it.
ACTION ITEM: Taxpayers over age 70 1/2 should consider making a charitable donation from their IRA.
This post originally appeared in November, 2018 and is being updated to reflect the current tax law of 2021.
Thomas F. Scanlon, CPA, CFP®