How the Tax Law Hits Charitable Giving
For charitable donors, the Tax Cuts and Jobs Act (TCJA) giveth and it taketh away. Here’s what charity-minded individuals need to know.
Increased Charitable Deduction Limit
Under prior law, deductions for cash contributions to public charities and certain private foundations were limited to 50% of your adjusted gross income (AGI). The TCJA increases the deductible limit to 60% of AGI for 2018-2025. Deductions that are disallowed by the 60%-of-AGI rule can generally be carried forward for five years.
Effect of Bigger Standard Deductions
For less-ambitious givers, charitable deductions may now be somewhat harder to come by. That’s because to deliver any tax-saving benefit, your itemized deductions, including charitable donations, must exceed the applicable standard deduction. The TCJA significantly increases the standard deduction amounts for 2018 to $24,000 for married joint-filing couples, to $18,000 for heads of households, and to $12,000 for others. (You can only deduct charitable gifts if you itemize deductions on your tax return.)
Donations to Obtain Collegiate Seating Rights
Under prior law, you could treat 80% of a payment for seating rights to college athletic events as a charitable donation if:
Starting in 2018, however, deductions under these arrangements are permanently eliminated.
Charitable Donations from IRAs
If you reach age 70½ and have more money than you really need, you can make cash donations to IRS-approved charities out of your Individual Retirement Account (IRA). To take maximum advantage of these qualified charitable distributions (QCDs) for 2018, replace some or all your 2018 IRA required minimum distributions (RMDs) with tax-smart QCDs. However, there are some rules you must follow.
Qualified Charitable Distribution Basics
QCDs can be taken out of your traditional IRAs free of any federal income tax bill. In contrast, other traditional IRA distributions are taxable (wholly or partially depending on whether you’ve made any nondeductible contributions over the years).
Unlike garden-variety charitable donations, you can’t claim itemized deductions for QCDs. But that’s OK. The tax-free treatment of QCDs equates to a 100% deduction — because you’ll never be taxed on those amounts, and you don’t have to worry about any of the tax-law restrictions that apply to itemized charitable write-offs.
A QCD must meet all the following requirements:
Key Point: If you inherited an IRA from the original account owner, you can also do the QCD drill with the inherited account if you’ve reached age 70½.
$100,000 Annual Limit
There’s a $100,000 limit on total QCDs for any one year. But if both you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined $200,000 total.
QCDs have at least four potential tax-saving advantages:
Are You a Good QCD Candidate?
Individuals who can afford to donate IRA money can benefit tax-wise if they match one or more of the following profiles.
Here’s an example that shows how qualified charitable distributions can deliver major tax benefits even with the increased standard deduction:
Fred and Wilma, ages 75 and 72, are a financially comfortable, married joint-filing couple. They have paid off their mortgage and live in a relatively low-tax jurisdiction. They only have about $10,000 of itemizable deductions, not counting any charitable donations. Typically, they donate about $15,000 a year to their favorite charities.
For 2018, their standard deduction is $25,600 (the normal $24,000 plus $2,600 extra because they are elderly). So, if Fred and Wilma donate their usual $15,000, they will receive no tax benefit because their $25,600 standard deduction would exceed their $25,000 of itemizable deductions.
Fred has traditional IRAs that had a combined balance of $350,000 as of December 31, 2017 (all from deductible contributions, otherwise taxable retirement plan rollovers, and accumulated earnings). Fred will still be 75 years of age as of December 31, 2018. His RMD for the 2018 tax year is $15,284 ($350,000 divided by 22.9 from the joint and survivor life expectancy divisors found in Table II in Appendix B of IRS Publication 590-B.
If Fred arranges for a $15,284 QCD in 2018, he will satisfy his 2018 RMD obligation without any tax hit on the RMD amount. This is equivalent to receiving a $15,284 tax deduction. So, Fred and Wilma can do their annual thing for charity in a very tax-smart fashion, despite the effect of the much-bigger standard deduction for 2018. Nice!
Should You Consider Roth QCDs?
Generally, the answer is no. Reason: You and your heirs can take federal-income-tax-free Roth IRA withdrawals after at least one Roth account owned by you has been open for at least five years. Also, for original account owners (not beneficiaries), Roth IRAs aren’t subject to the RMD rules until after your death.
Bottom line: Because the tax rules for Roth IRAs are so favorable, it’s generally best to leave Roth balances untouched rather than taking money out for QCDs.
The TCJA alters the playing field for charitably minded individuals. In particular, the QCD privilege may now be a really tax-smart opportunity for well-off seniors with more IRA money than they need for retirement. We can help you plan ahead to get the most tax-saving bang for your charitable bucks.