Beginning in 2018, the new tax law significantly increases the standard deduction and eliminates many deductions which will result in fewer taxpayers able to itemize their deductions. Taxpayers that will now use the standard deduction may not realize a tax benefit for charitable contributions.
One planning tool to alleviate this result may be available to taxpayers who are over age 70 ½ and are taking distributions from an Individual Retirement Account (“IRA”). Under the law, these taxpayers can direct up to $100,000 of these distributions from an IRA to a qualified charitable organization. This direct-to-charity transfer reduces the income reportable from the IRA, in effect creating a deduction for the charitable gift without the need to itemize deductions. Taxpayers should consider this option if they do not expect their itemized deductions to exceed the new standard deduction amount ($24,000 if married filing jointly, $18,000 head of household and $12,000 single).
Here’s how it works:
Charitable contributions must be paid directly from the taxpayer’s IRA to the qualified charity. You should coordinate this with your IRA custodian. This transfer qualifies towards fulfilling your annual required minimum distribution and the tax benefit is limited to $100,000.
A transfer from an IRA to a qualified charity only applies to taxpayers that are 70 ½ or older.
Example: A married taxpayer makes a tax-free transfer from an IRA to a qualified charity of $10,000 and is in the 22% bracket. The taxpayer is not eligible to itemize deductions because the standard deduction exceeds their itemized deductions. The tax savings will be $2,200.
Additional savings: By reducing your adjusted gross income, a taxpayer may also save in calculating the taxable portion of social security benefits and it may help keep your income below the threshold for being subject to the Medicare Part D and Part D high-income surcharge.
Please consult us if you would like to explore this planning opportunity.