MAKING CENTS OUT OF THE NEWS
(June 22nd, 2018)
Make Charitable Donations From Your IRA?
By Tom McAllister, CFP®
Due to two changes in the Tax Cut and Jobs Act of 2017 the number of returns which will report income tax savings from charitable contributions is projected to drop from 37 million last year to just 16 million this year.
This is due to the Act limiting itemized tax deductions to $10,000 per return and increasing the standard deduction to $12,000 for single returns, $24,000 for joint returns of married couples, and $18,000 for head of household returns. There are even higher thresholds for those individuals over 65. These changes will likely cause millions of taxpayers to convert to non-itemized filings. For example, among households with incomes between $86,000 and $150,000 the percentage of tax returns that will report itemized deductions is projected to fall from 39 percent to just 15 percent.
For those over 70 ½ the good news is no change was made to the law that permits us to make charitable gifts from our IRA accounts without recognizing any taxable income. In effect you still get income tax deductions for charitable gifts. They can make charitable deductions from their IRAs to satisfy their required minimum distribution obligation for the year, and would pay no income tax on those IRA withdrawals.
There are hundreds of thousands, maybe millions of us, over 70 ½ who have never taken advantage of this law. We saw little point in making charitable gifts from our IRAs because we were able to get tax savings by claiming itemized deductions for gifts to charity. So this article should be a “wake-up call.” We all need to determine whether we will be able to itemize our tax deductions in 2018. If not, then we may need to immediately stop making charitable gifts as we have in the past.
The law, commonly referred to as a “charitable IRA rollover,” permits individuals over 70 ½ to make charitable gifts directly from their IRAs to eligible charities and EXCLUDE these distributions from their gross income. The price: there is no itemized charitable income tax deduction for these gifts. However, if the taxpayer is unable to itemize their income tax deductions, then there is effectively no price to pay. They will have removed money from their IRA without incurring income tax on the withdrawal.
So taxpayers who used to itemize their deductions but no longer can, should in theory make all their charitable gifts from their IRAs. The primary obstacle to this is the impediment of making numerous small gifts from IRAs, which would likely drive IRA administrators up their respective walls. One practical solution is an “IRA checkbook” offered at some brokerage houses, where each check is a distribution from the IRA. Another approach would be to make contributions to a Donner Advised Fund (DAF), offered by most large mutual fund companies, a few times a year; then instructing the operators of the fund where to send the money. This one has the disadvantage of needing to “bunch” contributions normally made weekly or monthly, like church donations. into yearly or bi-yearly.
Time will tell whether, and by how much, the loss of itemized tax deductions reduces the number of charitable gifts as well as the numbers and amounts of gifts received by the nation’s charities. More than likely there will be substantial pressure on Congress to relax some of these restrictions. But there is one very large group of elderly donors who already can get income tax savings from all the charitable gifts they make, those of us born before July 1947!!
Tom McAllister, CFP