Tax Planning for Retirees & Charitable Giving

Retirees (over 70 1/2 years old) can obtain a tax benefit from charitable contributions even if they can’t itemize deductions!

It’s been estimated that the number of people who itemize their personal tax deductions will fall by more than 50% in 2018 because of tax law changes made in 2017. The main change is that the amounts needed to itemize deductions increased dramatically. For 2018, the standard deductions are $24,000 for joint filers, $18,000 for heads of household, and $12,000 for single filers (plus $1,300 for the elderly or blind, and $1,600 for a taxpayer who is unmarried and not a surviving spouse). While this is a benefit for many taxpayers who could not itemize before, this may end up changing ones giving strategy from a tax perspective (if you can no longer itemize deductions). However, for those taxpayers who are age 70½ or older and taking Required Minimum Distributions from their IRA, they can continue to gain a tax benefit from their charitable contributions even if they don’t itemize. This is done by using a Qualified Charitable Distribution (QCD).

A QCD can be used to exclude from income an amount up to $100,000 that would otherwise be taxable IRA distributions. The QCD is not included in gross income and thus no taxes are being paid on amounts given to charity directly from the IRA itself. Note that the IRA itself must make the donation directly to the charity. You are NOT permitted to receive the IRA funds personally and obtain the tax benefits of a QCD.

Tax Planning Example

LeBron and Savannah are both age 75 and will have $100,000 of adjusted gross income for 2018, including $50,000 of Required Minimum Distributions from their IRAs. They will not be able to itemize deductions on their Form 1040. Their standard deduction is $26,600 ($24,000 plus $1,300 each for “elderly”).

In 2018, they made charitable contributions in cash of $10,000.

Option 1: Receive the IRA distributions and write checks to charities for $10,000.

Gross Income: $100,000

Less: Standard Deduction: $26,600

Taxable income: $73,400

Federal Income Tax: $8,427

Option 2: IRA makes QCD to IRA directly for $10,000.

Gross Income: $90,000

Less: Standard Deduction: $26,600

Taxable income: $63,400

Federal income Tax: $7,227

Tax Savings with Option 2: $1,200 (12% of the $10,000 reduction in income).

With either option the charity receives $10,000. It is up to you if you want to consider the IRS a charity and pay an extra $1,200 in taxes (or not)!