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ZWM’s Advanced Planning Point: Revisiting Qualified Charitable Donations from your IRA

We remember the 2017 Tax Cuts and Jobs Act (2017 TCJA) lowered individual tax rates. And it raised the standard deduction for taxpayers to $24,000 for couples and $12,000 for single filers. All great news! But there are a few snags. We will discuss one here, but please remember, we at ZWM do not give or offer tax advice. So, be sure to review any of these ideas with your tax professional! 

An unintended consequence of the 2017 TCJA was to reduce the tax benefits of making charitable donations. Since the 2017 Act passed, fewer taxpayers are itemizing their deductions, given the generous standard deduction. This means none or very few of their donations count as tax deductions (please consult with your tax adviser to see if this would impact you). Itemizing taxpayers, including people who gave beyond the standard deduction threshold, found that the lower brackets reduced their tax benefits. 

The Urban-Brookings Tax Policy Center has estimated that the law reduced the marginal tax benefit of giving to charity by more than 30 percent, and raised the after-tax cost of donating by about 7 percent. Others have seen similar decreases. 

Some taxpayers, however, can avoid these limitations. As we know, people aged 72 and older who have IRAs are required to take Required Minimum Distributions (RMDs) out of their account. And we know that the RMDs generally increase with age. If clients are charitably inclined, and otherwise frustrated by the new tax rules, they can take their distribution in the form of a Qualified Charitable Distribution (QCD). The distributions must be a direct transfer to the charitable organization(s) of their choice, up to a limit of $100,000 annually, per person. 

How does that benefit our clients? If the QCD is made directly to the charity, it is not counted as income for federal tax purposes. And therefore, it reduces the income that the taxpayer must include on the Form 1040. In effect, the QCD gives back the full charitable deduction that was otherwise lost to the tax reform writers. 

Due to a quirk in the law, IRA owners as young as age 70 1/2 can make QCDs, even though they aren’t required to take RMDs until age 72. Why would someone take a distribution before they must do so? Some taxpayers find it advantageous to reduce the size of their IRA before they have to start taking distributions; this may lower their future income to fit into lower tax brackets. 

If a taxpayer and spouse each have IRAs, each can make their own qualified charitable donations. And the option is not limited to IRA owners.  IRA beneficiaries (people who have inherited an IRA) can also make QCDs if they so choose. 

Another point: We have helped many of our clients establish Donor Advised Funds (DAFs). One may not make a QCD from their IRA to their DAF. In English, no Qualified Charitable Contributions may be made to a Donor Advised Fund. 

Finally, taxpayers who make the full $100,000 donation direct to a charity can also make further donations out of their IRA. But in those cases, any amounts over $100,000 will be treated as a taxable distribution, which may then qualify for a charitable deduction, if the taxpayer itemizes deductions. 

As always, please feel free to contact me or your ZWM Fiduciary Wealth Advisor about this or any other financial matter. 

Tom Zimmerman 

Chief Fiduciary Wealth Advisor 

Zimmerman Wealth Management, LLC 

And as always, and to repeat, we at Zimmerman Wealth Management, LLC do not provide tax advice, and nothing contained herein should be construed as such. Please consult with your tax professional for more on how this could impact you and your situation.