BY: Kevin R. Albaum, ESQ.
Clark, Campbell, Lancaster & Munson, P.A.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. Most of the changes went into effect on January 1, 2018, and do not impact 2017 taxes. The individual tax changes are favorable to many with the standard deductions being raised in 2018 ($12,000 for an individual. $13,600 for 65+ individual; $24,000 for married couple; and $26,600 for married 65+ couple) and most individual income tax rates being lowered a few percentage points. Further, the child tax credit is doubled from $1,000 to $2,000 and the estate tax threshold was raised ($11.2 Million for an individual or $22.4 Million for a married couple).
Some believe that because of TCJA that the number of households claiming a Charitable deduction for an itemized gift to non-profits organizations will shrink. As result of the increased standard deductions, many taxpayers may not be able to claim an itemized deduction for their charitable gifts. Although the standard deduction has been increased, there are planning opportunities to still receive a tax benefit for gifts to charities.
The question becomes should you stop donating to your favorite charities that depend on your donations for their day-to-day operations just because it may no longer be as tax-advantageous? No, as many people give to help benefit the charitable organizations they care about and not just for potential tax benefits. However, you may consider other alternative charitable giving opportunities.
An individual over age 70 ½ can transfer up to $100,000 per year from their traditional IRA (not Roth) to charity (the distribution can count as the Required Minimum Distribution) and if they follow the rules for a qualified charitable distribution, the gift will not count as taxable income to the individual. However, the distribution must go directly from the individual’s IRA to the charity to be transferred income tax-free. For example, if your RMD is $50,000 in a given year, you may direct all of the RMD, a portion of it or up to $100,000 from your IRA be distributed to a charity. If you direct $5,000 of the $50,000 RMD payment to a charity, you will recognize only $45,000 of income.
If you are interested in using your IRA to give to a charity, contact your plan administrator that manages your IRA and explain to them that you would like to make a qualified charitable distribution and they will help assist you in the transaction. It is very important not to receive your distribution first and then give the money to the charity (after you received it) as this will not qualify as a qualified charitable distribution of your IRA to a charity and will make the distribution subject to individual income tax. You can give up to $100,000 of your IRA to the charitable organization and name as many organizations you wish to receive the qualified charitable distributions (For example, you may give $50,000 from IRA to 5 different charities).
An individual may also bundle their contributions all at once, so they can benefit from a larger itemized deduction in certain years instead of making smaller gifts each year. If you do not wish for a charity to receive a lump sum gift in a given year, you may give the large sum to a donor advised fund (DAF). Often this large charitable gift is not given to the charity directly but instead given to a DAF. By using a DAF, you claim a large itemized deduction in one year, and the DAF will distribute the money to your favorites charities over time as you direct them. There are numerous charitable organizations and financial companies that can assist to establish and manage the DAF for you. DAFs are a good option for those that want to continue to make charitable donations but also obtain the income tax benefits while doing so.
Before setting up a DAF or planning IRA distributions to your favored charities, it is recommended that you contact either a qualified tax professional or an attorney to advise you on obtaining the tax benefits that you are seeking.
Kevin Albaum is an attorney in the Elder Law Practice at Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to firstname.lastname@example.org.