The number of taxpayers who will itemize starting with 2018 is estimated to drop by 50% due to the changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017). Taxpayers who are 70½ or older can still benefit from charitable contributions, even if they don’t itemize, by using qualified charitable distributions (QCD).

How it works:

Once a taxpayer turns 70½, they must begin taking money out of their traditional IRAs.  The amount to be taken is based upon their remaining life expectancy.  This is called their annual required minimum distribution (RMD). By directing this RMD to charity, instead of taking personally, the taxpayer now excludes this amount from their income. This means that the taxpayer satisfies their RMD requirement and satisfies their desire to make a charitable donation, but avoids not getting a benefit due to the new tax law.

QCDs cannot exceed $100,000 per year, and the amount properly distributed as QCD is excluded from income. Because this results in the taxpayer not taking a charitable deduction, there is no effect on itemizing deductions.  To qualify as QCD, transfers must be made directly by the IRA trustee to a qualified charity. (Note: private foundations and donor advised funds are not eligible for this treatment.)  Taxpayers cannot take the money personally and then send to the charity; this does not qualify.

Because the QCD reduces adjusted gross income (AGI), state income taxes will also be reduced.  The higher the taxpayer’s marginal tax bracket, the more tax dollars that can be saved.

In addition, if you can itemize, this reduces AGI and will also reduce the floor for medical expenses, which are only deductible to the extent that they exceed 7.5% of AGI.  Reducing AGI may also help decrease the effect of the 3.8% Medicare surtax on net investment income.

If a taxpayer can take advantage of QCD, there are many upsides to this tax strategy. Contact info@corrigankrause.com to become a client!