With tax season underway, many are learning how the tax reform changes actually affect them now that they’ve calculated their return for 2018. While it is too late to change last year’s taxes, it is a great time to discuss plans for your 2019 tax liability. One noticeable change has been for seniors who no longer need to itemize and opt for the larger standard deduction. These taxpayers may need to rethink their normal strategy of looking for deductions and shift to minimizing taxable income. This is where a qualified charitable distribution can help those who are taking required minimum distributions from their IRAs.

When you opt for the standard deduction, you do not benefit from any itemized deductions you may have, including charitable contributions. So, any after-tax money you’ve given to your favorite charity may not help you at tax time.

Qualified charitable distributions became a permanent part of tax law in 2015. They allow individuals who are older than 70 ½ and are taking RMDs to transfer up to $100,000 per year from their IRAs directly to a qualified charity. While this doesn’t qualify for a charitable contribution deduction, it does lower your adjusted gross income and taxable income.

For example, let’s say you and your spouse, married filing jointly, are both age 73, and have a combined RMD total of $110,000 in 2019. For simplicity, our example will exclude other potential sources of income, like Social Security, pensions, or a taxable portfolio. At age 73, you may claim the standard deduction of $24,400 plus an additional $1,300 for each taxpayer older than 65, bringing your standard deduction to $27,000. Less the standard deduction, this places you in the 22 percent marginal tax bracket with an approximate tax liability of $9,977.

If you chose to make a qualified charitable deduction of $10,000, that would reduce your required RMD total to $100,000. You’d still get to claim the standard deduction of $27,000, bringing your adjusted gross income down to $73,000, which should place you in the 12 percent marginal tax bracket with an approximate tax liability of $8,372. You will not owe tax on the $10,000 you gave to the charity.

While this example provides a unique situation by changing the marginal tax rate of the taxpayer, most senior taxpayers should still benefit from giving directly from their IRA as it lowers their adjusted gross income. This is a significant savings over giving to charity after you take the distribution, as charitable deductions are “below the line” deductions, meaning they only reduce your tax liability by a percentage of the donation.

You’ll want to coordinate your qualified charitable distribution with your custodian and your tax consultant. Often it is easier to request two distributions, one payable to you, and one payable to the charity of your choice. Furthermore, your custodian may not identify the qualified charitable distribution on your 1099-R, so it is your responsibility to let your tax preparer know as well as ensure that you have the proper documentation from the charity to substantiate your donation.

Finally, you’ll want to be aware that qualified charitable distributions can only be made to qualifying charities, and not a private foundation, donor-advised fund or supporting organization at this time.

William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.


(0) comments

Welcome to the discussion.

Keep it Clean. Please avoid obscene, vulgar, lewd, racist or sexually-oriented language.
Don't Threaten. Threats of harming another person will not be tolerated.
Be Truthful. Don't knowingly lie about anyone or anything.
Be Nice. No racism, sexism or any sort of -ism that is degrading to another person.
Be Proactive. Use the 'Report' link on each comment to let us know of abusive posts.
Share with Us. We'd love to hear eyewitness accounts, the history behind an article.