If you’re age 70½ or older, the Tax Cuts and Jobs Act changes may make it more beneficial for you to make your charitable contributions –
up to $100,000 annually – from your IRA. By giving all or part of your required minimum distributions to qualified charitable organizations, you will avoid paying tax on the RMD. Additionally, this break may be especially beneficial now because TCJA also changes who can benefit from the itemized deduction for charitable donations.
Counts toward your RMD
You must begin taking annual RMDs from your traditional IRAs in the year you reach age 70½. If you don’t comply, you can owe a penalty equal to 50 percent of the amount you should have withdrawn but didn’t. Deferral is allowed for the initial year, but you’ll have to take two RMDs the next year. A charitable IRA rollover can be used to satisfy required minimum distributions.
So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to satisfy the RMD requirement without triggering the tax liability if the RMD were paid directly to you.
Itemizing not required
You might be able to achieve a similar tax result from taking the RMD and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation if you itemize.
With the TCJA’s near doubling of the standard deduction, fewer taxpayers will benefit from itemizing. Itemizing saves tax only when itemized deductions exceed the standard deduction. For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households, and $24,000 for married couples filing jointly.
Weigh your options carefully
Even if you have enough other itemized deductions to exceed your standard deduction, taking your RMD and contributing that amount to charity has two more possible downsides.
First, the reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.
Second, if your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 60 percent of your adjusted gross income for the year. The TCJA raised this limit from 50 percent, but if the cash donation is to a private non-operating foundation, the limit is only 30 percent. You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.
A charitable IRA rollover avoids these potential negative tax consequences.
The considerations involved in deciding whether to make a direct IRA rollover have changed in light of the TCJA. It is important to weigh all the factors before you decide the best route for your situation. Your tax adviser can help you determine the best scenario for you.
Mike Klein is a partner in the audit and accounting department at Ciuni & Panichi, Inc. in Beachwood.
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