For charitable donors, the Tax Cuts and Jobs Act (TCJA) giveth and it taketh away. Here’s what charity-minded individuals need to know.

Increased Charitable Deduction Limit

Under prior law, deductions for cash contributions to public charities and certain private foundations were limited to 50% of your adjusted gross income (AGI). The TCJA increases the deductible limit to 60% of AGI for 2018-2025. Deductions that are disallowed by the 60%-of-AGI rule can generally be carried forward for five years.

Effect of Bigger Standard Deductions

For less-ambitious givers, charitable deductions may now be somewhat harder to come by. That’s because to deliver any tax-saving benefit, your itemized deductions, including charitable donations, must exceed the applicable standard deduction. The TCJA significantly increases the standard deduction amounts for 2018 to $24,000 for married joint-filing couples, to $18,000 for heads of households, and to $12,000 for others. (You can only deduct charitable gifts if you itemize deductions on your tax return.)

Donations to Obtain Collegiate Seating Rights

Under prior law, you could treat 80% of a payment for seating rights to college athletic events as a charitable donation if:

  • The payment was to or for the benefit of a college, and
  • The payment would be treated as a deductible charitable donation except for the fact that the payment entitled you to receive (directly or indirectly) the right to buy tickets to athletic events of the college.

Starting in 2018, however, deductions under these arrangements are permanently eliminated.

Charitable Donations from IRAs

If you reach age 70½ and have more money than you really need, you can make cash donations to IRS-approved charities out of your Individual Retirement Account (IRA). To take maximum advantage of these qualified charitable distributions (QCDs) for 2018, replace some or all your 2018 IRA required minimum distributions (RMDs) with tax-smart QCDs. However, there are some rules you must follow.

Qualified Charitable Distribution Basics

QCDs can be taken out of your traditional IRAs free of any federal income tax bill. In contrast, other traditional IRA distributions are taxable (wholly or partially depending on whether you’ve made any nondeductible contributions over the years).

Unlike garden-variety charitable donations, you can’t claim itemized deductions for QCDs. But that’s OK. The tax-free treatment of QCDs equates to a 100% deduction — because you’ll never be taxed on those amounts, and you don’t have to worry about any of the tax-law restrictions that apply to itemized charitable write-offs.

A QCD must meet all the following requirements:

  • It must be distributed from an IRA, and it cannot occur before you, as the IRA owner or beneficiary, reach age 70½.
  • It must meet the normal tax-law requirements for a 100% deductible charitable donation. If you receive any benefits that would be subtracted from a donation under the normal charitable deduction rules, (such as free tickets to an event), the distribution cannot be a QCD. Beware of this rule!
  • It must be a distribution that would otherwise be taxable. A Roth IRA distribution can meet this requirement if it’s not qualified (tax-free). However, making QCDs out of Roth IRAs is generally inadvisable for reasons explained below.

Key Point: If you inherited an IRA from the original account owner, you can also do the QCD drill with the inherited account if you’ve reached age 70½.

$100,000 Annual Limit

There’s a $100,000 limit on total QCDs for any one year. But if both you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined $200,000 total.

Tax-Saving Advantages

QCDs have at least four potential tax-saving advantages:

  1. QCDs aren’t included in your adjusted gross income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based rules — such as those that can cause more of your Social Security benefits to be taxed, fewer of your rental estate losses to be deductible, and more of your investment income to be hit with the 3.8% net investment income tax. QCDs are also exempt from the rule that says your charitable write-offs can’t exceed 60% of your AGI for the years 2018-2025.
  2. A QCD from a traditional IRA counts as a distribution for purposes of the RMD rules. Therefore, you can arrange to donate all or part of your 2018 RMD (up to the $100,000 limit) that you would otherwise be forced to receive before yearend and pay taxes on.
  3. QCDs are treated as coming from the taxable layer of your IRA balance. Say, for example, that you own one or more traditional IRAs to which you have made nondeductible contributions over the years. Your IRA balances consist of a taxable layer (from deductible contributions and account earnings) and a nontaxable layer (from those nondeductible contributions). QCDs come from the first, taxable layer. Any nontaxable amounts are left in your IRA(s). Later, those nontaxable amounts can be withdrawn tax-free by you or your heirs.
  4. QCDs reduce your taxable estate, although that’s much less an issue for most folks right now because the TCJA drastically increased the federal estate tax exemption for tax years 2018 through 2025. The exemption for 2018 is a whopping $11.18 million ($22.36 million if you’re married).

Are You a Good QCD Candidate?

Individuals who can afford to donate IRA money can benefit tax-wise if they match one or more of the following profiles.

  • You want to avoid being taxed on the required minimum distribution amount you must take from your IRA.
  • You’re wealthy and looking for a quick and easy estate tax reduction strategy.
  • You’re limited in making itemized charitable donations because of the increased standard deduction for 2018-2025.

Here’s an example that shows how qualified charitable distributions can deliver major tax benefits even with the increased standard deduction:

Fred and Wilma, ages 75 and 72, are a financially comfortable, married joint-filing couple. They have paid off their mortgage and live in a relatively low-tax jurisdiction. They only have about $10,000 of itemizable deductions, not counting any charitable donations. Typically, they donate about $15,000 a year to their favorite charities.

For 2018, their standard deduction is $25,600 (the normal $24,000 plus $2,600 extra because they are elderly). So, if Fred and Wilma donate their usual $15,000, they will receive no tax benefit because their $25,600 standard deduction would exceed their $25,000 of itemizable deductions.

Fred has traditional IRAs that had a combined balance of $350,000 as of December 31, 2017 (all from deductible contributions, otherwise taxable retirement plan rollovers, and accumulated earnings). Fred will still be 75 years of age as of December 31, 2018. His RMD for the 2018 tax year is $15,284 ($350,000 divided by 22.9 from the joint and survivor life expectancy divisors found in Table II in Appendix B of IRS Publication 590-B.

If Fred arranges for a $15,284 QCD in 2018, he will satisfy his 2018 RMD obligation without any tax hit on the RMD amount. This is equivalent to receiving a $15,284 tax deduction. So, Fred and Wilma can do their annual thing for charity in a very tax-smart fashion, despite the effect of the much-bigger standard deduction for 2018. Nice!

Should You Consider Roth QCDs?

Generally, the answer is no. Reason: You and your heirs can take federal-income-tax-free Roth IRA withdrawals after at least one Roth account owned by you has been open for at least five years. Also, for original account owners (not beneficiaries), Roth IRAs aren’t subject to the RMD rules until after your death.

Bottom line: Because the tax rules for Roth IRAs are so favorable, it’s generally best to leave Roth balances untouched rather than taking money out for QCDs.

Conclusion

The TCJA alters the playing field for charitably minded individuals. In particular, the QCD privilege may now be a really tax-smart opportunity for well-off seniors with more IRA money than they need for retirement. Your tax adviser can help you plan ahead to get the most tax-saving bang for your charitable bucks.