With the holidays quickly approaching, gifts are on the top of people’s minds. With the end of the year rapidly following, holiday gifts are not the only gifts people are concerned with. With the possible reduction of future income tax rates, the acceleration of income tax benefits for charitable deductions before year-end are on people’s minds as well. Philanthropy not only gives you great personal satisfaction, it can also give you a current income tax deduction, let you avoid capital gains tax and reduce the amount of future taxes your estate may owe when you pass away.
Under the Tax Cuts and Jobs Act (TCJA), charitable contributions will continue to be deductible for income tax purposes and the limit on an individual’s contributions of cash to charitable organizations has increased from 50% to 60% of the donor’s Adjusted Gross Income. On the other hand, the standard deduction has increased from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married filing jointly filers. This means taxpayers need to consider this change in order to receive a tax benefit for yearly charitable contributions – total itemized deductions, including charitable contributions, must exceed the standard deduction.
Following are two charitable planning strategies to overcome the limitation from the increased standard deduction. The first strategy is for certain individuals who are of the age 70 ½ and currently receive required minimum distributions (RMDs) from their Individual Retirement Account(s) (IRAs) and the other charitable planning strategy is for those individuals who make charitable contributions to various organizations.
1. Qualified Charitable Distribution (QCD):
A QCD allows individuals who are over the age of 70 ½ to distribute money directly from an IRA to a qualified charity. A QCD satisfies an individual’s RMD and the distribution is excluded from a taxpayer’s adjusted gross income. This reduces an individual’s taxable income for income tax and Medicare premium purposes. The total annual QCDs from all IRAs cannot exceed $100,000 for any taxpayer, while a taxpayer’s spouse can make an additional QCD up to $100,000. One consideration of QCDs is that while QCDs are nontaxable at the federal level, the QCD may be taxable for state tax purposes. In addition, bear in mind that QCDs must come from IRAs and are not allowed from employer provided retirement plans, for example 401(k) plans.
2. Donor Advised Fund (DAF):
Another strategy taxpayers can utilize is to bunch all of their charitable contributions into one tax year in order to exceed the standard deduction. One vehicle that can accomplish this objective is a DAF. A DAF allows donors to receive an immediate tax deduction for the full value of assets donated to the DAF. The assets in the DAF grow tax-free and can then be subsequently gifted to one or several charities based on the preferred timetable of the donor. DAFs can also be used as complimentary vehicles for charitable trusts, private foundations and other charitable-giving vehicles.
How Can We Help?
For more details on charitable planning, or other year-end tax planning opportunities, please contact your Withum Tax Advisor or fill out the form below and we’ll respond to you shortly.