For charitable donors, the Tax Cuts and Jobs Act (TCJA) provided some tax breaks and took away others. Here’s what charity-minded individuals need to know.
Under prior law, deductions for cash contributions to public charities and certain private foundations were limited to 50% of your adjusted gross income (AGI). The TCJA, which passed in December of 2017, increased the deductible limit to 60% of AGI for the 2018-2025 tax years. Deductions that are disallowed by the 60%-of-AGI rule can generally be carried forward for five years.
For less-ambitious givers, charitable deductions may now be somewhat harder to come by. That’s because to deliver any tax-saving benefit, your itemized deductions, including charitable donations, must exceed the applicable standard deduction. The TCJA significantly increases the standard deduction amounts. For 2022, it is $25,900 for married joint-filing couples, $19,400 for heads of household and $12,950 for others (in 2021 these figures were respectively $25,100,$18,800, $12,550).
If you reach age 70½ and are charitably inclined, you can make cash donations to IRS-approved charities out of your Individual Retirement Account (IRA). To take maximum advantage of these qualified charitable distributions (QCDs), replace some or all your IRA-required minimum distributions (RMDs) with tax-smart QCDs. However, there are some rules you must follow.
Qualified Charitable Distribution Basics
QCDs can be taken out of your traditional IRAs free of any federal income tax bill. In contrast, other traditional IRA distributions are taxable (wholly or partially depending on whether you’ve made any nondeductible contributions over the years).
Unlike garden-variety charitable donations, you can’t claim itemized deductions for QCDs. But that’s OK. The tax-free treatment of QCDs equates to a 100% deduction — because you’ll never be taxed on those amounts, and you don’t have to worry about any of the tax-law restrictions that apply to itemized charitable write-offs.
A QCD must meet all the following requirements:
Key Point: If you inherited an IRA from the original account owner, you can also do the QCD drill with the inherited account if you’ve reached age 70½.
$100,000 Annual Limit
There’s a $100,000 limit on total QCDs for any one year. But if both you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined $200,000 total.
QCDs have at least four potential tax-saving advantages:
Are You a Good QCD Candidate?
Individuals who can afford to donate IRA money can benefit tax-wise if they match one or more of the following profiles.
Should You Consider QCDs from a Roth IRA? Generally, the answer is no. Reason: You and your heirs can take federal-income-tax-free Roth IRA withdrawals after at least one Roth account owned by you has been open for at least five years. Also, for original account owners (not beneficiaries), Roth IRAs aren’t subject to the RMD rules until after your death.
Bottom line: Because the tax rules for Roth IRAs are so favorable, it’s generally best to leave Roth balances untouched rather than taking money out for QCDs.
The TCJA altered the playing field for charitably minded individuals. In particular, the QCD privilege may now be a really tax-smart opportunity for well-off seniors with more IRA money than they need for retirement. Your tax advisor can help you plan ahead to get the most tax-saving bang for your charitable bucks.
Please contact Richard Morris via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.