The itemized income tax deduction for charitable contributions will likely be lost for many taxpayers, but there are options.
Taxpayers age 70 ½ can make Qualified Charitable Distributions from an IRA
When taxpayers reach the age of 70 ½ and own an IRA, they are able to make a qualified charitable distribution (QCD). A QCD allows the taxpayer to distribute money directly from their IRA to a qualified 501(c)(3) charitable organization, not including private foundations or donor-advised funds. The maximum annual exclusion for QCDs is $100,000 per taxpayer per year and must be distributed by December 31. The QCD option has been available for several years. However, due to increased standard deduction amounts under the Tax Cuts and Jobs Act, the QCD option is now even more advantageous.
Increased standard deduction amounts will reduce or eliminate the benefit of itemized deductions, including charitable contributions, for some taxpayers
Under the new tax law, the standard deduction has increased to $12,000 for single filers and $24,000 for joint filers under the age of 65. Taxpayers over the age of 65 can deduct an additional $1,300 making their standard deduction $13,300 for single filers and $26,600 for joint filers. The new law also modified rules to some itemized deductions and did away with the miscellaneous section. Therefore, it is expected that fewer individuals will meet the required amount of expenses to be able to itemize their deductions for tax year 2018.
Potentially limited or no benefit from charitable contributions
Consequently, the itemized income tax deduction for charitable contributions will likely be lost for many taxpayers. This is something to consider if a taxpayer is charitably inclined, at the age of 70 ½ or older, and has an IRA. If so, a QCD may be the right decision for them. A QCD is fully excluded from income which, in turn, reduces adjusted gross income, taxable income and income tax. An added advantage to QCDs is that in the year contributed, the amount contributed counts toward satisfying required minimum distributions (RMDs) that a taxpayer must take starting at age 70 ½. However, this added benefit is only valuable if a taxpayer does not need the RMDs to meet their living expenses.
Although a QCD is a tax-sensible direction for those who already planned to make charitable contributions, it may not be the right move for every taxpayer. Be cautious when considering the advantages and disadvantages of this opportunity. If you decide to make a QCD, make sure your tax preparer knows that you did so. The IRS form that you will receive is a standard 1099-R distribution form which does not specify that the distribution was a QCD.
Author: Jacinda H. Ruzicka
Please contact your Herbein + Company tax consultant if you have any questions or need assistance on this matter.
For additional information, email us at email@example.com.