Tax reform has affected nearly every American tax payer in one way or another, but are you making the most of opportunities available to you now? One of the biggest changes in the 2017 Tax Cuts and Jobs Act was the nearly doubling of the standard deduction. The standard deduction essentially doubled ($12,000 single, $24,000 married filing joint) and the deduction for state and local income and property taxes was capped at $10,000. It is estimated that the number of households itemizing deductions will decrease by 70% as a result of these changes.
It’s important to understand that when you claim the standard deduction, you are not getting any financial benefit for your charitable donations on your federal tax return. But for those charitably minded individuals who have an Individual Retirement Account (IRA), are over age 70.5 and have Required Minimum Distributions (RMDs) exceeding their lifestyle needs, it’s possible to both claim the new larger standard deduction and get a financial benefit for your generosity by using the Qualified Charitable Distribution (QCD) strategy.
The QCD strategy allows you to send payments directly from your IRA to the charitable organization(s) of your choice and have it count towards your RMD. This means that the charitable giving out of your IRA reduces your adjusted gross income (AGI), taxable income, and the resulting tax liability. It’s important to note that this special treatment does not apply if you receive the RMD and later decide to donate the cash to charity. Additionally, the maximum that you can transfer is capped at $100,000 per person per year.
While the QCD is a great strategy for many individuals, actually getting the financial benefit will not occur until your tax return is accurately prepared. Make sure to let your tax preparer know that you completed a QCD when you go to a file a return, as they won’t have access to that information unless you provide it.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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Wealth Enhancement Group is a Greater Minneapolis-based independent wealth management firm offering comprehensive and customized financial planning and investment management services. Established in 1997, Wealth Enhancement Group uses a team approach with a focus on simplifying their clients’ financial lives and has offices nationwide.