The 2017 tax reform made sweeping changes that will affect your income tax returns starting in 2018 (though most provisions are temporary and are set to expire after 2025).
One of the most significant changes is the doubling of the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, state and local income tax, sales tax, and property tax deductions are now limited to a combined $10,000 limit. As a result of these and a few other minor changes, many people will no longer be able to itemize deductions, but will be using the aforementioned higher standard deduction.
If you use the standard deduction, you will no longer be able to receive an additional tax break for contributions you make to a qualified charity. However, if you are at least age 70 ½ and have an IRA, there is a special section in the tax code that can provide some relief. A qualified charitable distribution, or QCD, allows anyone aged 70½ or older on the date of the contribution to donate up to $100,000 annually to a public charity directly from your IRA without counting the amount as taxable income.
Since this $100,000 limit is per taxpayer, a married couple could each give $100,000 from their respective retirement accounts. While this provision has been in the tax code since 2009, and made permanent in 2015, it has become much more significant due to the 2017 tax changes.
A critical provision is that the distribution cannot be paid to the IRA owner, but instead it must be payable directly to the charity. There is no need to withhold income tax from the distribution since it will not be included in your taxable income.
The QCD can satisfy all or part of any Required Minimum Distribution (RMD). A QCD can even be used by the beneficiary of an inherited IRA, but it cannot be distributed from a SIMPLE IRA or SEP IRA if the participant is still actively receiving employer contributions. While a QCD can be taken from a Roth IRA, there is no tax advantage since the Roth distributions are generally not taxable.
Keep track of charitable deductions
Assume Wayne, a 71-year-old married retiree, has an adjusted gross income of $90,000, including a $45,000 RMD from his IRA. This income would place him in the 22% marginal income tax bracket for 2018. His accountant tells him that he will be using the standard deduction for 2018 since his itemized deductions will add up to an amount less than the new $24,000 standard deduction.
If Wayne has the desire to give $10,000 to charity, he can do so, but it would not lower his taxes because he will not benefit from itemizing deductions. If, however, if he sends the $10,000 from his IRA directly to a qualified charity, the taxable distribution from his IRA will no longer be $45,000, but only $35,000. The $10,000 qualified charitable distribution will not be included in his taxable income.
This reduction in taxable income will reduce his 2018 tax bill by $2,200 (22% of $10,000). Wayne could even designate the beneficiary the payee on the full $45,000 if he wishes, and pay zero tax on the distribution.
One vital consideration is that the investment custodian that holds your IRA will report your QCD as a normal distribution and not as a qualified charitable distribution. You must notify your tax preparer to ensure the distribution is entered as a QCD on your income tax return or you will lose the tax break.
Since tax laws are extremely complex, you should always seek the advice of a qualified tax professional before you make any decisions.