The Tax Cuts and Jobs Acts of 2017 made sweeping changes to the tax code. One of the most significant changes was the raising of the standard deduction amounts across the board. The standard deduction is a dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, and for heads of households, the standard deduction will be $19,400.
The tax foundation stated that approximately 12% of taxpayers itemized in 2021. This compares to over 30% in recent years. This empirical evidence means that taxpayers whose homes are paid for and who live in a low tax state, such as South Carolina, and who are charitably inclined have lost the ability to deduct charitable contributions as itemized deductions.
Thankfully, there is still a way to make charitable contributions and get the benefit of a tax deduction, but only if you are age 70½ and older. Those of us in that category are required to withdraw at least an IRS-mandated amount (known as the required minimum distribution) each year from all of our qualified accounts, e.g., IRAs and 401k plans.
If your retirement assets reside in an IRA, using a Qualified Charitable Distribution can provide you with the opportunity to transfer up to $100,000 per year from your IRA directly to a qualified charity. Remember that this technique is only available for IRAs and for individuals who have reached age 70½.
Any amount processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability.
Consider a 75-year-old whose RMD is $62,000. He can contact his IRA trustee or vendor and designate $8,000 to be given directly from the IRA to his church, and he would still benefit from the standard deduction for himself and his wife. If this person were in the 25% marginal tax bracket, his tax savings would be $2,000 from using the QCD strategy.
Currently, there is no code available on the form 1099-R to identify a qualified charitable distribution, so if you employ this technique, be sure to inform your tax preparer that you made a QCD and the amount. Most tax software can account properly for charitable contributions made in this fashion by inserting “QCD” in box 4(a) of the 1040 form.
Bear in mind that any charitable contributions you make this manner may not be included as itemized deductions (if you will have an itemized deduction total in 2019 that will exceed your standard deduction).
— Your assets must be in an IRA (can be an inherited IRA) – not a 401(k).
— You must be at least 70½.
— Your QCD’s cannot exceed $100,000 in a tax year