The holidays are behind us and by now most of us have forgotten about our New Year’s Resolutions- I know I have. Therefore, it’s time to get back to the normal craziness of our lives. As most of you know, we have a new tax law that will have some impact on the great majority of us. The tax law is very comprehensive and it will take a while for even people like me, who follow tax laws, to understand it and to be able to work with it. That being said, there is one change in the tax law that I do want to discuss.
One of the major changes in the tax law deals with the standard deduction. The standard deduction has been raised to $24,000 for a married couple and $12,000 for a single person. The effect of this is that more people will find that when it comes to filing their tax return, taking the standard deduction as opposed to itemizing their deductions is a much better strategy.
I bring this up because many seniors will soon be taking their required minimum distribution from their retirement accounts. Because of the new higher standard deduction some seniors who deducted their charitable contributions in the past will no longer itemize their deductions, and thus they will not be able to deduct their charitable contributions. For those individuals who will now be taking the standard deduction and who still plan to make charitable contributions, a strategy they should consider is to make their charitable contributions directly from their minimum required distribution (MRD). By doing a Qualified Charitable Distribution (QCD) many seniors will find that they receive a significant tax savings.
Typically, when you take a MRD, the money that you receive is subject to income taxes. However, if you donate your MRD by doing a QCD you are not taxed on that money. Therefore, by avoiding the tax on the distribution and by receiving the new higher standard deduction, seniors can be one of the big winners in the new tax law. In addition, there can be other benefits to seniors, such as potentially keeping your income below the threshold for being subject to the high income surtax on Medicare.
The key to donating your MRD is that the money must be issued directly from your IRA custodian to the charity. If you take your MRD and have the money sent directly to you, you cannot take advantage of this strategy. Therefore, before taking their MRD this year, seniors who make charitable contributions and want to continue doing so should consider this strategy.
The aforementioned strategy only works if you are over 70½, and only deals with distributions from your retirement account. However, if you are charitable in nature and because of the increased standard deduction you find that your charitable contributions are not deductible, there are still ways to make that contribution on a tax efficient basis. For example, you can donate appreciated securities to a charity and even though you may not get the charitable deduction, you would avoid the tax on the gains on that investment.
The bottom line, there will be winners and losers in the new tax law. However, if you look at taking advantage of opportunities created by the new tax law, you may find that you are one of the winners.
If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.