As a result of the passage of the Tax Cuts and 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.
Here’s 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, as well as any additional charitable contributions made. But in 2018, with the new $10,000 cap on state and property taxes and 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. Because 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, which would further reduce the deductible amount of charitable contributions.
The ABCs of QCDs
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 (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than age 70 1/2, and you have to make the contribution before any taxable required minimum distributions (RMDs) are withdrawn from the account.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 RMDs 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) to be able to deduct the $10,000. Alternatively, you can transfer the $10,000 from your IRA to the charity as a QCD to satisfy the first $10,000 of your RMD, then withdraw the remaining $30,000 in the usual way. With this approach, 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 qualified 501(c)(3) charity, not to a private foundation or a donor-advised fund. Note that once an RMD has been taken, that amount is no longer available for a QCD (so be sure to take the QCD first). In addition, you cannot carry over to the following year any QCD in excess of your RMD. And of course, there’s no benefit to donating highly appreciated stock from an IRA as there is from a taxable account, because all withdrawals from IRAs (except nondeductible contributions) are subject to ordinary income rates rather than capital-gains rates.
Despite these limitations, seniors wishing to maximize their deductions for charitable giving should certainly consider this option for 2019.
Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, visit cognizantwealth.com.