This year brings new challenges for our federal income taxes. Among the many changes wrought by Congress when it passed the new Tax Cuts and Jobs Act of 2018 was the change in rules for itemized deductions. While federal income tax rates for individuals were lowered slightly, many of us have lost tax deductions which were very meaningful. For example, one can deduct only up to $10,000 of state and local taxes in 2018. Many of us pay real estate taxes that alone exceed $10,000 before even considering the PA or NJ state and city income taxes. Plus one can no longer deduct investment advisory fees.
In lieu of these deductions, there is now a single standard deduction in 2018 of $24,000. This change should lower income taxes for anyone who in the past did not have itemized deductions that amounted to $24,000. But for those who had deductions that were greater than $24,000, they may now be limited to only a $24,000 standard deduction. The amount of their deduction will depend upon how much they lose in state and local tax deductions in addition to how much is lost in investment advisory fees they have and which can no longer be deducted.
For some of us there may be a solution to this problem. To benefit from this solution, you must own an Individual Retirement Account (“IRA”), have reached age 70 ½ and should be charitably minded. If you make significant charitable gifts each year but will no longer be able to take advantage of the full tax deduction because of the changes in the itemized tax deduction rules, there is a tool that can help. It is referred to as a Qualified Charitable Distribution (“QCD”). Here is how it works.
When one attains the age of 70 ½, the tax code requires participants in IRAs to start taking their Required Minimum Distribution (“RMD”). The amount of the RMD will vary depending upon one’s age and the amount held in the IRA. Distributions from IRAs are subject to federal income tax. How much income tax you pay will depend upon your income tax bracket. Here is the solution for saving. If you choose to have some of your RMD paid to a public charity instead, you will not have to pay any income tax on the amount paid to the charity. But you will lose the charitable deduction for the charitable gift. You may be thinking “What is so good about that? Well, let me explain.
Let’s suppose that your itemized deductions in 2018 will be $14,000 before making any charitable gifts. If you make $10,000 of charitable gifts in 2018, then your total itemized deductions will be $24,000 – the same amount as the Standard Deduction. You get no tax benefit from making any charitable gifts.
Now let’s suppose that your IRA RMD is $10,000. You will have to pay federal income taxes on the $10,000 RMD. If you are in a 30% income tax bracket, that means you will pay $3,000 of federal income taxes on the RMD. However, if you ask the IRA plan administrator to send the $10,000 RMD directly to your favorite public charity, you still will have the $24,000 Standard Deduction but you will not have to pay any income taxes on the RMD. This will save you $3,000 in federal income taxes just by making your charitable gift through your RMD instead of the traditional way of sending the charity your personal check. Making the charitable gift directly from your IRA is a QCD.
How much a person can save using this technique will depend upon how much one donates to charity and how much one’s total itemized deductions will be under the new income tax rules. However, unless one has lots of deductible mortgage interest, the likelihood of doing as well by using the itemized deduction method of taking your charitable deduction instead of by making a QCD is not very good.
Some important facts to keep in mind. First, this technique only applies to IRAs. Second you cannot wait until the very end of the year to ask the IRA plan administrator to make the QCD for you. The check or wire must come directly from the IRA plan administrator and must arrive and be deposited before the end of the year. Third, not all IRA plan administrators will let you do this. It is our understanding that Schwab, Fidelity, T. Rowe Price and Vanguard have procedures to make QCDs, and your QCD does not have to go to only one charity. Fourth, the maximum QCD is $100,000 per year and you can divide up your QCD among more than one charity. Unfortunately, a QCD cannot be made from any other type of retirement plan.
But don’t wait! Your tax saving is just waiting for you. Take advantage now!
We will be happy to help you calculate the benefit you will receive by making a QCD. Please let us know if we can help. Thank you.
Spector Gadon & Rosen, P.C. Estate Planning Department
Alan Mittelman amitt@lawsgr.com 215-241-8912
Miguel Pena mpena@lawsgr.com 215-241-8810
