The Tax Cuts and Jobs Act, passed at the end of 2017, significantly alters many of the deductions to which we have become accustomed. CPA’s and financial planners continue to unravel the new laws but one of the new changes is clear. The new tax law will reduce the tax benefit of charitable giving for many individuals. However, the changes also make a previous rule more advantageous. While this option, the Qualified Charitable Distribution, was available for nearly a decade prior to the Tax Cuts and Jobs Act, it would lapse and be reinstated every other year. Finally, in 2015, the law was made permanent and after 2017, it could become an even more important part of tax and financial planning.
As part of the new tax law, the standard deduction has almost doubled this year, moving from $6,350 to $12,000 for individuals and $12,700 to $24,000 for a married couple. This, in addition to the combined $10,000 limit on state income and property tax, means that fewer people will itemize their deductions. For many, this will eliminate the tax incentive for charitable giving (though we expect this isn’t the only reason many choose to give).
There is, however, still a way to receive a tax benefit from charitable giving without itemizing, if you are taking a Required Minimum Distribution (RMD). An RMD is a required distribution from retirement asset planning for individuals who have turned 70½. If you’re one of these individuals, the IRS allows you to give up to $100,000 per year from retirement accounts directly to charity. This Qualified Charitable Distribution (QCD) reduces the taxable amount of your IRA distribution and thus lowers not only your taxable income, but also your adjusted gross income.
Obviously, reducing taxable income reduces the amount of income tax you will pay. But reducing your adjusted gross income can also save you money in the future, as it is this value the government uses to calculate your Medicare Part B premiums.
Please note that the custodian of your account (i.e. Schwab, Fidelity, TD Ameritrade, Vanguard, etc.) will not account for the QCD on your 1099-R, which shows the distributions from your retirement accounts. You will need to maintain your own documentation and provide that to your tax return preparer in order to take advantage of this benefit. Please remember to keep good records for your charitable contributions.
With the elimination of itemized deductions for many, we believe that the Qualified Charitable Distribution will take on greater importance for those who must take money from their retirement accounts each year.
ABOUT THE AUTHOR: Karla McAvoy, CFP®, MBA
Senior Financial Advisor and Principal
HC Financial Advisors, Inc.
When I entered college, I thought I wanted to be a doctor. Once I discovered that I hated chemistry and I was extraordinarily squeamish around blood and injury, I discovered a love for supply and demand curves and majored in Economics. In 2001, just after I finished an MBA, I discovered financial planning and decided to pursue my Certified Financial Planning (CFP®) credential and am thrilled to have come full circle in my career. I love working with people to achieve their financial goals and sometimes imagine myself still being that doctor for our clients; instead of helping with their physical well-being, however, I help with their financial well-being.