Most of us like to give and want to help out worthy causes. But new, higher standard deductions have made charitable contributions less beneficial and often non-deductible. So what is a person to do? Although everyone’s specific financial and tax situation is different, leveraging their IRAs to keep giving has been beneficial to many seniors.
Historically, senior clients would take their annual required minimum distribution (RMD) from their IRAs, SEP’s, SIMPLEs or 401-k plans. This RMD is the amount the IRS requires you to withdraw each year from your retirement plan(s) once you reach age 70 ½. The amount of the distribution is generally included as ordinary income and is taxable in most situations. In the past, most clients would report the income and then they would itemize their taxes to include charitable contributions and as long as their total itemized deductions exceeded the standard deduction, they received a financial benefit from making the charitable contributions.
In 2018, however, the new tax law essentially doubled the standard deduction level. In addition to higher standard deduction, limits placed on the amount of state and property taxes that are deductible as an itemized deduction are also making charitable giving look less attractive at first glance. Meaning if you no longer have expenses that qualify as itemized deductions on your return, then essentially you receive no financial benefit from making the charitable contributions. To illustrate: Assume John & Mary are 71 years old and normally itemize for tax purposes. In 2017, between state and property taxes, charitable deductions, mortgage interest and any other qualifying expenses they had $20,000 in itemized deductions. In this case they benefited from their charitable contributions. In 2018, the $20,000 would be below the standard deduction so they would benefit more taking the standard deduction and by not itemizing. In other words, the money they gave to charities in 2018 provided them with no benefit taxwise. They would have received the same level of deductions had they not given any money to charities.
To avoid this unhappy scenario, it’s important to know that sending your IRA distributions directly to a charity allows you to reduce your taxable income by the amount donated to the charity. It doesn’t impact your taxable deductions because you still qualify for the higher standard deduction level.
For example, let's say your RMD is $50,000 for 2019 and you take it as a normal distribution you will report $50,000 as income; however, if your RMD is $50,000 and you give $20,000 of the $50,000 directly to charities then you will only report $30,000 as income. If you don’t itemize you still get the same standard deduction level you would if your income was the $50,000. Even if you still itemize, taking the reduction from your income is usually much more beneficial than taking it as an itemized expense.
Jeff Iannone is president and CEO of Ables, Iannone, Moore & Associates, Inc., an investment advisory firm in Savannah. David Haverstick is a financial advisor with the firm. They are not tax advisors and encourage readers to consult with a tax professional about their personal tax situation.