New Tax Law Offers Added Incentive to Make Tax-Free Transfer of RMDs From Your IRA to Charity
[ANSWER]Yes. The new tax law doesn't change the rules for qualified charitable distributions, or QCDs, which let people older than 70½ transfer up to $100,000 from their IRAs to charity each year and have it count as their RMD without being added to their adjusted gross income. In fact, the new law is likely to make QCDs attractive to more retirees.
The new law also doesn't change the basic rules for charitable deductions (other than increasing the deduction limit for cash contributions from 50% to 60% of your adjusted gross income). But because the law nearly doubled the standard deduction, fewer people will itemize deductions -- and you can only deduct charitable contributions if you itemize. Until Congress changed the rules, the 2018 standard deduction was scheduled to be $13,000 for joint filers, $6,500 for single filers and $9,550 for those filing as head of household. But now, the 2018 basic standard deduction will be $24,000 for joint filers, $12,000 for single filers and $18,000 for heads of household. Taxpayers older than 65 get an even better deal. Each spouse age 65 or older gets an extra $1,300, so if both husband and wife are 65 or older, the standard deduction is $26,600; single taxpayers and heads of household age 65 and older get an extra $1,600, bringing their standard deduction to $13,600 and $19,600, respectively. It makes sense to itemize only if your itemized deductions are larger than that threshold.
Meanwhile, the new law also limits some other itemized deductions that make it even more difficult to cross that threshold. For example, the law caps the itemized deduction for state and local taxes (including property, sales and income taxes ) at $10,000. The deduction for interest paid on home-equity loans is eliminated for both new and existing loans. And the mortgage-interest deduction will be limited to interest on the first $750,000 of debt for home loans taken out after December 14, 2017 (interest on up to $1 million in mortgage debt is deductible for loans taken out on or before December 14).
But the tax-free transfer from an IRA lets you benefit from making the gift to the charity even without itemizing. This way, you can still take the standard deduction but your charitable gift isn't included in your adjusted gross income and taxed. "One of the groups that always benefited most from the QCD technique includes those who wouldn't have been able to deduct their charitable contributions," says Tim Steffen, director of advanced planning for Baird Wealth Solutions Group . "With more taxpayers claiming the standard deduction as a result of these changes, they won't necessarily get a tax benefit from their charitable contributions. By using the QCD technique, they can actually still get a benefit for those donations." Keeping $10,000 out of your taxable income, for example, saves $2,200 if you're in the 22% tax bracket.
Keeping your RMD out of your adjusted gross income could also have other benefits. For instance, it may help keep your income below the threshold for being subject to the Medicare Part D and Part D high-income surcharge (which boosts premiums for people whose AGI plus tax-exempt interest is more than $85,000 if single or $170,000 if married filing jointly). And it may hold down the percentage of your Social Security benefits that's subject to taxation (for more information, see Do You Have to Pay Taxes on Social Security Benefits? ).
For more information about the new tax law, see 26 Ways the New Tax Law Will Affect Your Wallet .
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