The benefits of charitable contributions may be eliminated for some taxpayers. The Tax Cuts and Jobs Act (TCJA) doubled the standard deduction, meaning more taxpayers may find themselves in a better tax position by choosing the standard deduction over itemizing. Since charitable contributions are itemized, this is leaving many to wonder, “Will I still receive tax savings from my charitable donations?” The answer is yes depending on the scenario. In this article, we’ll examine a method of charitable giving and the tax saving advantages.
Taxpayers age 70 ½ and older are eligible to make direct contributions from their IRA to charitable contributions, without the burden of owing income tax on the distributions. These direct contributions are limited to $100,000 per year and are a great way to donate to a favorite organization, without the need to itemize. These contributions also help satisfy Required Minimum Distributions (RMD). RMDs are required to be taken annually, beginning in the year the taxpayer turns age 70 ½, and are heavily penalized if the taxpayer chooses not to withdraw. These penalties can equal 50% of the amount that should have been withdrawn but wasn’t. By making a direct contribution from an IRA, taxpayers can avoid paying tax on the distribution and help satisfy their RMD for the year.
Even if a taxpayer does benefit from taking the itemized deduction over the standard deduction, it may still be beneficial to donate through an IRA. For taxpayers who donate large sums of money, it is important for them to keep in mind that cash donation deductions are limited to 60% (up from 50%) of their adjusted gross income (AGI) for the year if they itemize. Any excess over 60% can be carried forward up to 5 years, but if the taxpayer intends on donating large amounts of cash year after year, this carry forward will not help. By choosing to make a charitable contribution through their IRA, taxpayers no longer face the AGI limitations, although they will still be limited to the $100,000 annually.
Charitable contributions are a great way to show support for organizations and help those in need, often while receiving a tax benefit. Even though the TCJA has impacted the number of taxpayers who will benefit from itemizing, there are other ways taxpayers can receive a tax benefit from their donations. If you have questions about your specific tax savings from charitable contributions, contact your TDT tax professional today to discuss your options and to see if charitable contributions through your IRA are the right choice.