The 2017 tax law nearly doubled the standard deduction and therefore significantly reduced the number of filers who itemize deductions. Retirees may be disappointed to learn they cannot deduct their charitable gifts for income tax purposes this year. Only 8% of filers are expected to take a charitable deduction this year, down from 20% in the past, according to the Tax Policy Center in Washington, D.C.
For clients who are over age 70 ½, there is a workaround that preserves the tax benefits of giving, even if they don’t itemize. Using a qualified charitable distribution (QCD), they can donate all or a portion of the required minimum distributions (RMDs) from IRAs directly to charity—up to $100,000 per year.
From a tax perspective, it works like this: The QCD is immediately deducted from the adjusted gross income, which has significant tax implications. While clients don’t receive a write-off for gifts through the QCD, they won’t owe taxes on retirement account distributions.
Here’s an example: If a client is in the 22% tax bracket, he or she can save $1,100 in federal income taxes by directing a $5,000 distribution to a QCD. The net is the same as if the client had been able to deduct the gift from gross income. By donating this way, your clients can reduce their adjusted gross income, which can mean less taxable Social Security and possibly lower Medicare premiums.
There’s yet another tax-planning perk: If your clients reside in states that don’t allow itemized deductions and they take advantage of a QCD, they may pay less in state taxes as well.
The bottom line: Directing required minimum distributions from IRAs to a QCD can reduce federal tax liability, and has the potential to reduce state taxes, social security taxes, and Medicare premiums. It also means charities of choice still receive their gift – it’s a win-win for all. For more information about how to take advantage of a qualified charitable distribution, please contact me or a member of your JDJ team.