Thanks to all of you who came out to the Observer & Eccentric 2018 Senior Expo and heard me speak on taxes. It was a wonderful event, and I’m already looking forward to next year. As I was taking some questions after my talk one thing became clear, and that is there is some confusion about one of the changes in the tax law. In particular, people were confused about the deductibility of charitable contributions. Therefore, I thought I would, once again, explain the rules.
Fundamentally, there has been no change in the rules regarding charitable contributions. You can continue to deduct your charitable contributions as normal. However, there has been a change in another part of the law that does impact charitable contributions. Although charitable contributions are deductible, the majority of people are going to find that since the standard deduction has doubled, ($24,000 for a married couple, $12,000 for single) they will not be itemizing their deductions. Rather, they will just take the standard deduction. Because the standard deduction is generally going to be greater than most peoples’ itemized deductions, the result is that more likely than not, whether you make a charitable contribution or not, it will have no impact on your taxes.
Last year nearly 50 million households filed returns that itemized their deductions. It’s anticipated that when people file their 2018 return, less than half that number will itemize. There is, however, a workout for those that are charitable in nature and who are over 70½, and are thus mandated by law to take a distribution from their IRA and retirement accounts.
For those who are over 70½, you are eligible to donate all or a portion of your required minimum distribution to a charity. By donating all or a portion of your required minimum distribution to a charity, you don’t have to include that amount in taxable income. Therefore, the result is that you’re taking advantage of the higher standard deduction, and at the same time you are in effect still getting a substantial tax benefit by your contribution. The key is that the money has to go directly from your IRA custodian to the charity. If the IRA custodian writes you a check in your name and then you sign that check over to the charity, you unfortunately do not get the tax break. The check cannot be written to you, nor can the money be deposited into your account. For you seniors who are charitable in nature, using your required minimum distribution for charitable contributions is a win-win. You get the higher standard deduction and you can exclude from income the amount of your required minimum distribution that goes to a charity.
For those of you who are not 70½ and who will not be itemizing your deduction because of the new standard deduction, you unfortunately will not get a tax benefit by making a charitable contribution. However, you will get that good feeling knowing that you helped a needy cause. That being said, for those of you who will no longer itemize your deductions and are going to make a charitable contribution, it still makes sense to consider using investments you have a gain in. By donating appreciated securities, even if you can’t take a charitable deduction, you still can avoid some taxes –the taxes on the gain.
If you would like Rick to respond to your questions, please email Rick at email@example.com.