Tax Reform Provides Senior Citizens with Opportunities to Maximize Tax Benefits of Charitable Giving by Adam Cohen, CPA
Posted on August 08, 2018 by Adam Cohen
It is estimated that less than half the number of taxpayers who previously claimed deductions for charitable contributions will continue to do so beginning in 2018, when the rationale for itemizing deductions may no longer make fiscal sense. However, the passage of the Tax Cuts and Jobs Act (TCJA) does provide an opportunity for taxpayers age 70 ½ and older to continue to maximize the benefits of their philanthropic giving when they plan ahead.
Charitable Deduction Limits Under Tax Reform
Tax reform under the TCJA, allows taxpayers to continue to claim their charitable contributions as itemized deductions that they may subtract from their taxable income. Nonetheless, the law also limits the deductibility of several itemized expenses, eliminates many of the miscellaneous deductions that taxpayers previously used to reduce their tax liabilities while also doubling the standard deduction that is available to all taxpayers. As a result, more taxpayers will opt to simply claim the standard deduction and potentially lose any tax benefit from their charitable efforts. That is, unless they are retirees receiving required minimum distributions (RMDs) from their Individual Retirement Accounts (IRAs).
Converting RMDs into Charitable Contributions
The Internal Revenue Code requires U.S. taxpayers to begin taking annual RMDs from their traditional IRAs by April 1 in the year after they turn 70 ½, or risk significant penalties. The amount of the taxable RMD is calculated separately for each IRA a taxpayer owns, but the actual aggregate amount he or she receives may be paid out of one of more of his or her IRA accounts.
Individuals over the age of 70 ½ seeking to reduce their tax liabilities in a given year may transfer up to $100,000 of their annual RMD directly to a qualifying charity and exclude that amount from their taxable income. By making these qualified charitable distributions (QCDs), qualifying taxpayers meet their annual RMD requirements, avoid including distributed amount in their taxable income and allow those funds to further their philanthropic goals and support a charitable organization in need.
It is important to remember that while QCDs can yield significant tax savings, especially for high-earning taxpayers, they are neither considered income nor may they be claimed as deductions on an individual’s federal tax return. Moreover, special care should be taken to ensure the QCD is transferred directly by the IRA trustee to a qualifying charitable organization. If the IRA owner hands a check to the charity, the payment will not qualify for QCD treatment, even if the check comes from the IRA and is made payable to a charitable organization.
While the TCJA will make it harder for taxpayers to maximize the value that itemizing deductions once provided to them, philanthropic-minded individuals will continue to give to charity and some may even eke out a tax benefit.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.