May 2018 Newsletter to ClientsSubmitted by Moneywatch Advisors on May 2nd, 2018
Enjoy this month’s edition that features updates on the treatment of charitable contributions under the new tax law and our privacy notice.
Making Charitable Contributions Under the New Tax Law: When the federal tax law changed late last year, part of the concern raised by many was the potential impact of the law on charitable contributions. Specifically, would people still be inclined to give even if they are unable to deduct them from their income taxes? Do people give because they believe in the cause or because they simply want the tax deduction? For charitable organizations, colleges and universities and other groups, these are serious questions that could materially impact their mission. So, let’s walk through the potential deterrent to contributing and offer a solution for those over the age of 70 ½.
When completing your return, you have the choice of taking what’s called the standard deduction or itemizing deductions. Obviously, you deduct the larger amount. Under the new tax law that takes effect in 2018, the standard deduction for a married couple filing jointly doubles to $24,000. Plus, the law caps the deductions for state income and property taxes at $10,000. As a result, the only way to “receive credit” for your charitable contributions now is for them to total more than $14,000 in order for your total itemized deductions to exceed the new standard deduction of $24,000. Quick, raise your hand if you’re still reading this.
Yep, this is pretty awful stuff. So, here is a crisp explanation of how to receive a tax benefit from your charitable contributions if you are over the age of 70 ½:
As you probably know, we all must start taking what are called Required Minimum Distributions (RMDs) from Individual Retirement Accounts (IRAs) in the tax year in which we turn 70 ½. Those RMDs are subject to income tax. However, one can make Qualified Charitable Contributions (QCDs) by transferring up to $100,000 per year from an IRA directly to a qualified charity. This tax-savvy strategy offers the combined benefit of satisfying your annual RMD while lowering both your adjusted gross income and your taxable income, resulting in a lower tax bill to you.
Here’s how it works: Let’s say you and your spouse are both over 70 ½ and your combined RMDs total $24,000. If you wish to contribute $10,000 to say, the YMCA and God’s Pantry, it will reduce your taxable income by that same $10,000 and now only $14,000 is subject to income tax. And, even better, you still get to claim the standard deduction of $24,000 (plus an additional $2,550 because you’re both over the age of 65). So, assuming you’re in the 24% tax bracket, instead of paying income tax of $5,760 on that $24,000 of RMD subject to income tax, you would pay just $3,360 of tax on the new total of $14,000 of RMD income – a savings of $2,400.
This strategy is the classic win-win. 1) You satisfy part, or all, of your annual RMD; 2) You reduce your tax liability by the amount of your charitable contribution just like you used to; 3) You get to take advantage of the new doubled standard deduction; and, 4) You get the satisfaction of doing good for an organization you care about.
Privacy Notice: Our updated privacy notice is available here, please do not hesitate to contact us with questions or concerns.
Thank you for your continuing confidence.
Past performance is no guarantee of future results. The opinions expressed are those of Moneywatch Advisors, Inc. and are no guarantee of the future performance of any particular fund. This information is for educational purposes only and is not intended as investment advice. Please consult your financial advisor for more detailed information or for advice regarding your individual situation.