How Still To Get Charitable Tax Deductions
As a result of the passage of the Tax Cuts & Jobs Act in 2017, taxpayers (especially in California) may find themselves losing some of the deductions they used to get for charitable contributions on their 2018 taxes. Let’s use a simple example to explain this. Suppose you are married and have the following annual expenses:
- Property taxes: $15,000
- State taxes: $12,000
- Mortgage interest: $10,000
In 2017 the entire $37,000 would have been deductible, plus any additional charitable contributions made. But in 2018, with the new $10,000 cap on state and property taxes and the increase in the standard deduction to $24,000, you would only be able to deduct a total of $20,000 based on the above expenses. Since the standard deduction is $4,000 higher, you’d effectively lose the tax deduction from the first $4,000 of charitable contributions.
Of course, if your mortgage interest were greater than $14,000 in the above example, you’d get the full deduction for any additional charitable gifting. On the other hand, if you’re a retiree, you may not have a mortgage at all, potentially increasing the amount of non-deductible charitable contributions. The good news is that there’s another way for seniors to get a tax deduction for charitable contributions regardless of whether or not they itemize deductions. It’s called a qualified charitable distribution or QCD.
A QCD allows you to make a charitable contribution directly from your IRA up to $100,000. You have to be older than age 70 ½ and you have to make the contribution before any taxable required minimum distributions (RMDs) are withdrawn from the account. If you follow those two rules, you can use the charitable gift to reduce (offset) the amount of RMD subject to income taxes.
Here’s how it works: suppose you are age 73 and have a $40,000 RMD due from your IRA account in 2019. If you were to withdraw the $40,000 and give $10,000 of it to your favorite charity, you would need to have at least $24,000 in other deductions (as described above) in order to be able to deduct the $10,000. Alternatively you can transfer the $10,000 from your IRA as a QCD and then withdraw an additional $30,000 to satisfy the remainder of your RMD for the year. In the latter case, even if you are not itemizing deductions, you would still achieve a $10,000 reduction in taxable income.
The contribution must be made to a standard 501(c)(3) charity, not to a private foundation nor to a donor advised fund. Note also that you cannot get a deduction for any QCDs that exceed your RMD for the year, nor can you carry-over any excess to the following year. And of course there’s no benefit to donating highly-appreciated stock from an IRA as there is from a taxable account since all withdrawals from IRAs (except for non-deductible contributions) are subject to ordinary income rates rather than capital gains rates. Nonetheless, although too late for 2018, seniors wishing to maximize their deductions for charitable giving should certainly consider this option early in 2019 before withdrawing your RMDs.