Recent changes to the federal income tax laws make it less likely that taxpayers will itemize deductions, like charitable donations. This is, in large part, because fewer taxpayers benefit by itemizing their deductions with the increased standard deduction amount (now generally $24,000 for a married couple filing jointly). According to one study, only 13.7% of taxpayers will itemize deductions on their 2019 federal tax return – down from 31.1% who itemized deductions before the changes took effect.1 At certain income levels, the estimated gap increases to four times fewer people itemizing under the current law. One of the goals of tax reform was to simplify tax filing for the average American. Claiming the standard deduction instead of itemizing does simplify the tax return process. Unfortunately, one unintended result of these changes has been a reduction in charitable donations by individuals. Statistics on the exact amount vary, but it’s clear that taxpayers have less financial incentive to donate when there is no tax deduction available for the donation.
For taxpayers who own an IRA, however, there is still a way to donate to a charity and reduce their tax liability. If you own an IRA (or an inherited IRA) and are age 70½ or older, you can make a tax-free Qualified Charitable Distribution (QCD) of up to $100,000 each year. Because QCDs must come from pre-tax savings, the money you donate will be entirely tax-free (you did not pay tax on the money going into the IRA and you will not pay tax on the money you donate). As another incentive to donate from your IRA, you may satisfy your required minimum distribution (RMD) with a QCD. This can help decrease your taxable income for the year because you don’t have to include in income the amount of RMD you choose to donate. Another benefit for some taxpayers who have a large amount of basis (nondeductible contributions) in their traditional IRAs is that because QCDs must come from pre-tax savings only, making a QCD can help deplete an IRA of assets that you would otherwise be taxed on when distributed from the IRA. This increases the proportionate amount of basis left in the IRA so future distributions will include more nontaxable dollars.
To make a tax-free QCD, you must meet certain requirements.
To learn more about how you can make a QCD for 2019, contact Mainstar Trust and the charitable organization of your choice to obtain all the necessary information to complete the donation.