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Caring For Generations

When Do Charitable Deductions Make a Difference in Your Taxes?

On Behalf of | Mar 25, 2020 | charitable estate planning, charitable giving

“The purpose of charitable tax deductions is to reduce your taxable income and your tax bill, – and improving the world while you’re at it,” begins an article in Fidelity Charitable. That’s certainly one way to put it, but here at Rebecca W. Geyer & Associates, we find that our clients tend to look at the matter the other way around: Their purpose is to improve the world, garnering as many tax deductions as allowed by law while they’re at it. Now, at least one important aspect of charitable planning has been impacted by the SECURE Act, which was just enacted into law at the end of last year.

By way of review, donating to charity directly from an IRA is not new, having been allowed on a temporary basis since 2006, then permanently allowed since 2017. QCDs (Qualified Charitable Distributions) work as follows:

  • A distribution is made out of an IRA directly to a public charity.
  • That distribution is on behalf of an IRA beneficiary who turns 70 ½ in 2020 (or is older).
  • The charitable gift can be no more than $100,000 in any given year.

While required minimum distributions were delayed until age 72 under SECURE, QCDs remain available at the age of 701/2. What’s different now, post-SECURE, is this: if the account owner makes deductible traditional IRA contributions after attaining age 701/2 but before the year of the QCD, the traditional IRA deduction will be recaptured up to the amount of the QCDs for all of the preceding taxable years after the account owner attains age 701/2. There is no limit on the number of years that will be subject to recapture after age 701/2. The account owner can still get a charitable contribution deduction, if he or she itemizes, if the QCD is recaptured.

In addition, under the new law, most IRA heirs are no longer allowed to “stretch” their payments over a lifetime, instead required to “clean out” the account (and pay tax on the distributions) over no longer a period than ten years. That change has created more of an incentive for IRA owners to use those tax-deferred assets for charitable giving, assigning other, non-IRA assets to family heirs.

So, does being charitable make a significant difference in taxes?* Donors of cash to public charities can take up to 50% of their adjusted gross income as a deduction; donors of appreciated assets such as stocks and property can deduct up to 30% of AGI.* When money is moved directly from an IRA account to a charity of the client’s choice, no income is reported.

Might the same thing be accomplished by a client taking his/her Required Minimum Distribution out of the IRA, paying the tax on it, then contributing to the charity and deducting the contribution on the tax return? Not really. There are a few reasons why::

  1. The full amount of the distribution (even the excess over the Required Minimum Distribution and up to the $100,000) can go directly to the charity. The contribution is thus not limited by either:
    the RMD amount for the year or the percentage of adjusted gross income (see above)
  2. With the money travelling directly to the charity, this avoids raising income to a level that might affect whether Social Security is taxable, and avoids affecting Medicare part B premiums (because “income” is unchanged)..

*Our attorneys offer no direct tax advice, instead working in cooperation with clients’ tax advisors to coordinate estate planning strategy with tax planning.

Post the SECURE Act, Qualified Charitable Distributions can make an even bigger difference – to both charities and taxpayers.

– by Rebecca Geyer