Understanding how the Tax Cuts and Jobs Act is impacting charitable giving is complicated. The new law didn’t change charitable deductions. However, your ability to claim the deduction depends on whether or not your itemized deductions exceed the standard deduction amount – $12,000 for an individual and $24,000 for married couples filing jointly.
But if you’re over 70 you can obtain the same tax benefits for charitable giving even if you don’t itemize. Here’s how.
Qualified Charitable Deductions in a nutshell
At the end of 2015, Congress reinstated — and made permanent — charitable IRA distributions. If you are age 70½ or older and plan to make charitable donations this year, a charitable distribution can provide significant tax benefits. It allows you to transfer up to $100,000 per year directly from your IRA to a qualified charity without including that amount in your gross income. Another benefit is the charitable distribution counts toward the amount you are required to withdraw from your IRA for the year (your “required minimum distribution” or RMD).
Qualified Charitable Deductions or QCDs offer valuable benefits, but it’s important to understand their requirements to avoid costly tax mistakes. In addition to minimum age and maximum contribution limits, the requirements include:
Traditional or Roth IRAs only. QCDs aren’t available for inherited IRAs, IRAs that are part of a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE), or other employer-provided retirement accounts. It may be possible, however, to move funds from an employer plan into an IRA (through a tax-free rollover) and then use the IRA to make a QCD.
Eligible charities only. The donation must be received by a public charity, a private operating foundation or a “conduit” private foundation. Donations to private nonoperating foundations, supporting organizations and donor advised funds aren’t eligible.
Direct transfers only. The IRA must distribute the funds directly to the charity. If it makes the check out to you, it’s not a QCD, even if you endorse it over to the charity.
Deferred taxable income only. A QCD must consist of deferred taxable income — that is, funds that otherwise would be taxable if distributed to you. It doesn’t include distributions that are attributable to nondeductible contributions to a traditional IRA or to otherwise tax-free distributions from a Roth IRA. For this reason, Roth IRAs generally aren’t good candidates for QCDs, unless distributions would otherwise be taxable (for example, because the account is less than five years old).
Fully deductible gifts only. To be a QCD, a donation must be “otherwise deductible” (i.e. the gift would be fully deductible, without regard to AGI limits, had you made it with non-IRA assets). If you receive something of value from the charity in exchange for your gift, it’s not a QCD.
Acknowledgment required. The charity that receives the distribution must provide you with the same type of written acknowledgment required to substantiate other types of charitable donations. Failure to obtain the acknowledgment will invalidate a QCD.
For more information on IRA charitable distributions contact your MarksNelson tax professional at 816-743-7700.