WIN-WIN PLAN FOR CHARITIES AND TAXPAYERS IN 2019
In 2019, the Tax Cuts and Jobs Act provides a new standard deduction which has doubled from $12,700 for a married couple in 2017 to $24,400 in 2019. Thus, most taxpayers will not itemize their deductions and will, instead take the standard deduction. As charitable deductions can only be taken if a taxpayer itemizes deductions, many individuals will lose the benefit of taking a deduction for charitable gifts.
Thus, assume that Mary and Bob want to benefit her favorite charity. Normally, if Mary withdraws $15,000 from her individual retirement account (“IRA”) (assuming that it is not a Roth IRA), she will pay income tax (and a possible penalty if under age 59 ½) on the distribution. If she distributes the $15,000 to the charity, then she will not get the benefit of the charitable deduction because their standard deduction ($24,400) exceeds the charitable contribution of $15,000.
However, let’s assume Mary is over 70 ½. The Internal Revenue Code has provided for a wonderful win-win situation for individuals over 70 ½ who want to benefit their favorite charity from their IRA. Mary can distribute up to $100,000 from her IRA directly to her favorite charity, but it must be transferred directly from the IRA to the charity.
Mary does not have to report the distribution as income and she still gets the benefit of her standard deduction. The net effect is that the QCD allows Mary the benefit of a charitable deduction, even though she is not otherwise able to itemize her expenses on her individual income tax return.
Further, if the withdrawal is made BEFORE Mary otherwise receives her minimum required distribution (“MRD”) from the custodian, this QCD can “count” towards her MRD.
ADVICE: Consider a QCD early in the year so that the MRD is not inadvertently paid to you directly. You can NOT get the MRD and THEN give it to charity and qualify for the QCD. If you receive the IRA distribution and then make the payment to the charity, the income will be includable in your income and the charitable payment could only be deducted if you itemize expenses.
WORD OF THE WEEK: Standard Deduction is an amount that is allowed any taxpayer as a reduction of income. Instead of itemizing certain expenses, the IRS allows you to take the standard deduction. Alternatively, a taxpayer can itemize expenses but they have to exceed the standard deduction to be of benefit to the taxpayer. As the standard deduction has substantially increased ($24,400 for a married couple in 2019) most individuals will use the standard deduction instead of itemizing expenses.
GENEROSITY IS A KEY TO HAPPINESS…REACH OUT AND HELP SOMEONE TODAY! 😎