25 Jun Getting the IRS to Match Your Charitable Gift
The recently enacted Tax Cuts and Jobs Act has altered the economics of giving for most Americans. Here’s a practical, tax-efficient way to have the US Treasury ‘pay its share’ of your philanthropic gift.
Contribution of cash or property to a qualified charity remains deductible as a valid ‘itemized deduction’ on an individual’s Federal income tax return. However, with the ‘standard deduction’ expanded to $12,000 and $24,000, respectively, for single and married couples, most taxpayers will now be non-itemizers (i.e. will claim the standard deduction). Using the standard deduction renders their contributions no longer deductible. An elegant, straight forward way around this is to give directly from your IRA to the charity via a ‘Qualified Charitable Distribution’ (QCD).
With the new tax act causing most to use the ‘standard deduction,’ an alternative method of giving is needed to get a valuable tax break.
This transaction effectively provides a charitable deduction over and above your full standard deduction, as the QCD is not included in taxable income. It’s the only distribution from a (Traditional) IRA receiving this leniency. Recall, the IRS gets their piece of your IRA by requiring you to take taxable distributions annually once you attain age 70½. A QCD counts toward your ‘required minimum distribution.’
Instead of writing a check to charity and taking a tax deduction, those 70½ and older should make gifts via QCDs, where the gift is made as a direct transfer from an IRA to the charity. This produces a better tax result than taking a taxable IRA distribution and then trying to offset it with a charitable contribution deduction. You’ve effectively ‘found’ an additional deduction and, in contrast with a taxable IRA distribution, the QCD does not increase Adjusted Gross Income. Higher AGI can trigger ‘stealth’ taxes by, for example, taxing more of your Social Security benefits and increasing your Medicare premiums.
For those 70 1/2 the QDC is better then a deduction; it meets your annual distribution requirement while avoiding taxable income from the withdrawal, which means it helps on the “stealth tax” front.
So, if this is the greatest thing since chocolate milk, what’s the catch? Unfortunately, you must be at least age 70½ at the time of the QCD, it only applies to pre-tax funds in IRAs (not company plans), the annual amount can’t exceed $100,000 per person, and the recipient can’t be a donor-advised fund or private foundation.
The tax savings to a QCD can be compelling enough that those approaching – but aren’t yet – age 70½ should consider deferring contributions until they’re eligible to benefit from the technique.
How significant are the tax savings stemming from QCD? The economic value of any income tax deduction is equal to the deduction times the marginal tax rate. Say you’re within the new 24% tax bracket for 2018 (starting at taxable income of $82,501 and $165,001 for single and married filers) and you gift $20,000 to your Church directly from your IRA. None of that distribution is taxable and all of it counts toward your 2018 required minimum distribution, which we’ll assume is $20,000 or more. The cash value of that effective deduction is $4,800 (24% of $20,000), plus additional relief on the ‘stealth tax’ front by virtue of lowering your AGI by $20,000. You’ve lowered your taxable income by the amount of the QCD in comparison with the alternative of taking the IRA distribution in cash and then writing a check to charity.
Savings $4,800 on a $20,000 gift is significant. Either way the charity gets $20,000, but the 24% tax savings on the cash gift means your Uncle (Sam) effectively expands your gift (with a $15,200 after-tax cost) by nearly a third, or $4,800; $4,800 / $15,200 = 32%. Think of your Uncle as a wealthy benefactor matching every $3 you donate with $1 dollar of his own, almost like an employer matching employee gifts through a corporate initiative.
Think of your Uncle Sam as a wealthy benefactor matching every $3 you donate with $1 dollar of his own, almost like an employer matching employee gifts through a corporate initiative.
This is an efficient and easily implemented way for IRA owners 70½ and older to support their charitable causes. We’re happy to share other compelling giving approaches for younger folks.