Tax Planning For Charitable Contributions in 2018

At this point in the year, most people over 70½ years old know what their 2018 required minimum distribution (RMD) will be. Before you or someone you know starts taking that RMD, make sure to consider the new tax law that went into effect this year.

The new tax law sought to lower tax rates and increase the standard deduction. A larger standard deduction means we’ll likely see fewer people itemizing deductions and, in some cases, receiving less of a benefit for those items that are considered an itemized deduction.  Given those massive changes, your strategy for giving to a charitable organization may change.

If you’re taking a RMD and considering making a charitable donation, remember to consider a qualified charitable distribution (QCD). A qualified charitable distribution allows you to direct up to $100,000 per year from your IRA to a qualified charity. Rather than receiving an itemized deduction for your donation, less of your IRA distribution would be considered taxable.

By using this strategy, your total income and taxable income would be less, allowing you to receive a tax benefit for donations to charity while still taking the standard deduction.

For instance, if you have a RMD of $27,000 and you give $100 to your church a month, rather than writing a check each month during the year you could directly donate $1,200 of your 2018 RMD to your church. As a result, you would still take the remaining RMD and pay taxes on that remaining amount of $25,800. The $1,200 that was given to your church from your IRA would not be include in your taxable income.

Couple key points to remember when making a qualified charitable distribution:

• First, you must be over 70 ½ years old.  Although you may have a RMD from a beneficiary IRA, you cannot donate that RMD unless you are also over 70 ½.
• Second, the money has to be given directly to a qualified charity. You cannot take the distribution into your bank account and then write a check to the charity, it must go from your IRA to the charity.
• Third, private foundations and donor-advised funds do not qualify for the QCD strategy.

The new tax law means all sorts of changes in opportunities and tax strategies. The QCD strategy is worth consideration for those who are charitably inclined and have to take RMDs.

Mandy Nowaczynski, CPA, CFP™
Tax Planner, Annex Wealth Management