Using Your IRA in Tax Giving

| May 25, 2018

In April, CPN began a series of articles of effective planning under the new tax law with a discussion of Donor Advised Funds.  This month we return to charitable giving to discuss Individual Retirement Accounts.

The Tax Cuts and Jobs Act (TCJA) went into effect on January 1, 2018.  One of the biggest changes was to nearly double the standard deduction in 2018 — to $12,000 for singles and $24,000 for joint filers younger than age 65 — while capping or eliminating other deductions. This means it will no longer make sense for as many taxpayers to itemize deductions. In 2017, 30% of taxpayers itemized; under the new tax law that is expected to drop to less than 10%.  This means that (without tax planning) 90% of taxpayers will have no tax benefits associated with charitable giving.

As explained in our previous article, the biggest reason WHY donors give is generosity and commitment to a cause.  But just as certainly HOW MUCH donors give is tied to the tax benefits.  With donors now looking at a substantial increase in the after-tax cost of their gift, charities are bracing for a reduction in giving of $16 billion to $24 billion annually (total giving was $390 billion in 2016, according to Giving USA).

But the tax law also preserved and even enhanced some opportunities for donors who plan their giving to take advantage of the new provisions. One (found at IRC §408(d)(8)) permits anyone 70½ or older to make a direct transfer of IRA balances up to $100,000 per year to a charity.  These qualified charitable distributions (QCDs) make it possible to net a greater tax benefit because those dollars will never be counted as part of your adjusted gross income.  In other words, you would have paid income taxes on that distribution – and so instead of realizing a deduction, you avoid the income.

Avoiding the income is actually better than getting the deduction, as keeping the QCD out of your adjusted gross income could help keep you below the threshold for being subject to the high-income surcharge for Medicare parts B and D, as well as hold down the percentage of your Social Security benefits that is subject to income taxes.  In addition, QCDs go toward satisfying your required minimum distribution, and are not subject to withholding.

As always, there are limitations and regulations, most importantly that QCDs must come from IRAs; they cannot come from 401(k) plans.  You will need to plan your IRA distributions each year, instead of having them automatically distributed.  For example, if you are set up to automatically receive your Required Minimum Distribution each year, you may want to turn off the payment and instead request two distributions: the QCD and any remaining RMD amount.

However you decide to proceed, you should discuss your planning with your financial advisor, to be sure you are making the best decision for your particular circumstance.

 

Careful planning combined with the generous use of resources fulfills the Biblical Proverb: There is treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up. (Proverbs 21: 20)


Category: Law

About the Author ()

Email | Website | Jocelyn Szymanowski is a principle with law firm of Ferguson, Schetelich & Ballew, P.A.. She received her Bachelor of Science degree in Criminal Justice from the University of Baltimore, her J.D. from Tulane University, and holds an LLM in taxation. Her practice focuses on business and non-profit organizations, real estate, tax, and banking. She was named a Rising Star by Super Lawyers Magazine.