Key Takeaways

  • The new tax law increased the standard deduction, which may have eliminated the ability to itemize charitable deductions.
  • One way to preserve charitable tax deductions is to do a qualified charitable distribution using funds from your required minimum distributions (RMDs).
  • Using your RMD for a qualified charitable contribution will allow you to reduce income while still employing the standard deduction.

By Rob Clarfeld | Chief Executive Officer, Clarfeld

It has been the biggest thing to happen to the U.S. tax system in decades. It’s the Tax Cuts and Jobs Act of 2017 (TCJA), which brought about some sweeping changes for individual taxpayers, including the near doubling of the standard deduction.

One thing it did not change, however, was the long-standing ability to make direct annual charitable contributions of up to $100,000 from an Individual Retirement Account (IRA) to a qualified charitable organization. Those distributions are not considered taxable income and even satisfy your required minimum distributions (RMDs), which must begin at age 70½. What the TCJA did do, however, was make charitable contributions from an IRA even more tax friendly than those made through traditional donations.

The impact of the increased standard deduction on charitable giving

For many taxpayers, the near doubling of the standard deduction ($12,200 for single taxpayers and $24,400 for married couples filing jointly) has made using the deduction more favorable than itemizing (I discussed this in a previous article The Impact of the New Tax Law on Charitable Giving). However, while the deduction has certainly made tax filing easier, it has reduced or eliminated the ability to deduct charitable contributions on state and local taxes. As a result, many taxpayers have resorted to bunching charitable donations every other year; some have even reduced their charitable giving altogether.

Recapturing charitable tax deductions

For those who take RMDs, there’s a solution that could allow you to recapture charitable tax benefits — a qualified charitable distribution (QCD). With this method of gifting, funds for the RMD go directly to the charity, thereby lowering your income and preserving your ability to use the standard deduction.

Other benefits of qualified charitable donations

In addition to allowing you to preserve the tax benefits of charitable contributions, QCDs still offer some pre-TCJA benefits. One such benefit is that it didn’t eliminate the 3.8% Medicare surcharge, an additional tax assessed for exceeding income thresholds by modified adjusted gross income (MAGI). A QCD will help lower a taxpayer’s MAGI, thereby reducing or even eliminating the surtax levy.

Also, since a QCD will reduce your adjusted gross income (AGI), you may be able to lessen the impact of unfavorable tax considerations related to AGI. These could include how your social security income is taxed, limits on deductions for rental losses, or restrictions on the deduction for medical expenses if you still itemize.

To learn more about how you can continue to carry out your philanthropic intentions and maximize tax savings — even with the new tax law — talk to your accountant.

More information

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