Give and Get: Qualified Charitable Distributions

Cameron Hamilton

Key Takeaways

  • 2017 Tax Reform has reduced the number of families who itemize deductions.
  • Those who don’t itemize may not realize tax benefits from charitable donations.
  • Qualified Charitable Distributions help donors above age 70 ½ realize a tax benefit.
  • Donors younger than 70 ½ should consider the timing of their contributions.

 

Helping people give is one of the most rewarding parts of my career.  It’s a true blessing to work with generous families who commit of their own resources to helping others.  Our tax code has long been helpful by incentivizing donors to give, but recent reform may have created unintended consequences that make giving less beneficial to donors.  Today we discuss this situation and a strategy we see to help donors maximize the benefit of their generosity.

 

One goal of 2017 tax reform was to reduce the workload of the IRS by reducing the number of families who itemize deductions.  To accomplish this, the standard deduction, the amount each filer can subtract from income before calculating their tax liability, was doubled.  In 2016, the most recent year for IRS statistics¹, less than 31% of households itemized deductions.  Tax researchers estimate this to fall to less than 15% in 2018 after tax reform.  Let’s see how this change can affect a family.

 

2017

2018

Mortgage Interest

$8,000

$8,000

State and Local Taxes*

$18,000

$10,000

Charitable Donations

$5,000

$5,000

Total Itemized Deductions

$31,000

$23,000

Result

Itemize

Standard Deduction

  $31,000

$24,400

 

The table above shows how tax reform affects a typical family.  Their biggest deduction, state and local taxes like their property tax and state income tax, are now capped at $10,000.  Thanks to this cap and the increased standard deduction, this family will not itemize deductions in 2018.  This means that those $5,000 of charitable donation provided zero tax benefit.  This family must donate $6,400 each year to itemize, and only donations above that amount reduce their tax liability.

 

We believe many families, especially retired couples, will find themselves in this predicament under the new tax code.  Charitable donations that used to reduce their tax burden will not provide this benefit any longer.  This is only exacerbated as they pay off their mortgages and stop working, reducing other deductions.

 

One option we discussed last year is open to everyone below the threshold to itemize: making lump sum donations.  Take a family that in the past donated $500/month and had itemized deductions of $20,000.  If they instead saved those donation dollars for the first year, in year two they could donate $1,000/month.  That would put them into itemizing territory and let them benefit from some of their giving.

 

For those over age 70 ½, we have a great strategy that does not alter when you make your donations.  Qualified Charitable Distributions² are donations made directly from an Individual Retirement Account (IRA) of someone who is over age 70 ½.  At this age, investors must begin Required Minimum Distributions (RMD), IRS mandated withdrawals from retirement accounts that let the money be taxed.  If the account owner donates their RMD directly, meaning straight from the custodian to the charity, the amount of the donation is not taxed.  A retiree in effect gets a dollar-for-dollar deduction for any RMD donated, up to a $100,000 annual limit.

 

Anyone who must take RMDs, who makes charitable donations, and who falls under the threshold for itemizing deductions should consider this strategy.  Even families who use their RMD for living expenses should consider if they also make charitable donations.  They can give the same amount of dollars to their charity of choice and pay less tax, leaving them extra money for their own expenses or to continue their generosity.  We encourage you to contact us and discuss this option if you think it applies to you.  It is a high-level strategy and some details have been omitted for brevity.  We are happy to work in cooperation with your tax preparer to ensure your giving works as intended.

 

 

  1. IRS Tax Stats https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-publication-1304-complete-report#_IndReturns
  2. IRS Publication 590-B outlines Qualified Charitable Distributions https://www.irs.gov/publications/p590b
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