You love giving. You don’t love paying taxes. Our new federal tax laws may hold some good news for you.
Some people think the large increase in the new standard deduction possibly removes the advantage of deducting charitable contributions. If your total annual deductions don’t exceed the new larger standard deduction, there is no advantage to itemizing these deductions when you file your taxes.
Common itemized deductions include charitable contributions, mortgage interest, real estate taxes, and state and local taxes. You can still make tax-deductible donations to charities, but they won’t decrease your taxes unless your total deductions exceed $12,000 for single filers and $24,000 for joint filers.
We believe the new tax law encourages us to think more creatively about how to time and execute our charitable contributions going forward. We will see two strategies become much more popular. The first will be the use of Qualified Charitable Deductions (QCD’s), which are used to move donations directly from IRA accounts to charities. The second strategy will utilize Donor Advised Funds, which allow us to double up charitable gifts in one tax year, while actually distributing the gifts to the charity over multiple years. We plan to write more about Donor Advised Funds in our next edition of our newsletter.
In this edition, we’ll focus on the use of QCD’s for your charitable giving. In order to benefit from this strategy, you have to be 70 ½ years old, and have a required minimum distribution (RMD) from an IRA account. A QCD is a direct payment from your IRA account to a charity. The payment can NOT be made payable to you. For example, you can’t call it a QCD if you take your required minimum distribution, deposit it into your checking account, and then write a personal check to the charity. In order to be classified as a QCD, it must be payable from your IRA custodian directly to the charity.
Some people ask “Can my distribution qualify as both a QCD and my Required Minimum Distribution (RMD) for the tax year”. Yes—a QCD does qualify as part (or all) of an RMD.
Using a QCD effectively lowers your taxable income by making that portion of your IRA withdrawal tax free, so you get a tax benefit for your charitable contributions even if you don’t qualify to itemize your deductions because of the higher limits for standard deductions.
In addition, a QCD saves you state income taxes, since it is not taxable to Ohio either. A traditional charitable gift would not be deductible on your Ohio income tax return.
It should be mentioned that QCD’s require some administrative time, so they may not be cost effective for small gifts, but they work really well for larger donations. They should also be executed well in advance of the 12/31 deadline.
We hope this idea allows you to receive a tax benefit for doing the thing we all love to do – bless others with what we have been given!