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Charitable Gifts from an IRA Can Decrease Your Tax Liability

Charitable Gifts from an IRA Can Decrease Your Tax Liability

October 25, 2018

Tax season is right around the corner, which means many people are seeking ways to reduce their tax liability. In the past, charitable donations were a popular avenue to make this happen. However, with the new tax law provisions, experts expect a significant decrease in these gifts.

The Tax Cut and Jobs Act of 2017 delivered good news and bad news to tax payers and charitable organizations.

The good news for taxpayers was twofold.

The marginal tax rate for high-income taxpayers was reduced, and the tax deduction for state and local taxes (SALT) was capped at $10,000 per return. Additionally, the standard deduction was raised from $6,350 to $12,000 for individuals and from $12,000 to $24,000 for married couples filing joint returns. This presents a great break in making it easier for more taxpayers to benefit without having to file itemized returns.

The bad news hits charitable organizations hard.

In the past, charitable donations were a great tool to reduce the taxpayer’s liability, but these new laws put a damper on that incentive to give. In fact, experts expect the number of charitable donations to drop significantly—from $37 million (in 2017) to a paltry $16 million in 2018.

Retirees can still benefit from QCDs.

However, one provision was left in place that benefits retirees who are 70 ½ and older—and this may be the saving grace for charitable organizations. Qualified charitable distributions (QCDs) from IRAs can still be made to satisfy required minimum distribution (RMD) rules without incurring a tax liability. In fact, QCDs allow you to donate up to $100,000 every year to qualified charities.

Retirees are thankful this provision was left in place (and so are charitable organizations!). The QCD does not count towards gross (taxable) income even though the donation satisfies RMDs. QCDs also greatly benefit those over 70 whose IRA withdrawals push them into high income brackets that result in an increase of Medicare premiums. If distributions from your IRA push you over that threshold, you can make a QCD that reduces your modified adjusted gross income. This maneuver can potentially lower your Medicare premium and save you thousands every year.

Requirements for QCDs

  • QCDs apply to qualified, 501(c)(3) charitable organizations only.
  • Donations must be made directly from the IRA to the charity. Meaning: you cannot take a distribution to make that gift. (If your IRA is structured so  that you can write checks directly from those funds, you may be able to write a check for the donation.)

QCDs present a solid way to relieve your tax liability if you are over 70 years of age. But, before you make a QCD, it is critical that you consult with your IRA custodian to ensure you follow their procedures for these donations. Also, you should seek the advice of a trusted CPA or financial advisor to determine your tax liability and to help you with any potential tax-saving strategy.