How Tax Cuts and Jobs Act (TCJA) Effects Charitable Donations on Your 2018 Tax Return

With the passing of the Tax Cuts and Jobs Act (TCJA), it’s estimated that the number of taxpayers who will itemize on their 2018 tax return will fall by more than half compared to

Can I still get a tax benefit if I itemize on my tax return?

2017.  This is NOT good news if charitable giving is a regular part of your itemized deductions. For those who are 70 ½ or older using a Qualified Charitable Distribution can gain a tax benefit from, even if they don’t itemize.  The key is to make a gift by way of a qualified charitable distribution (QCD).

Charitable contributions may still be claimed as an itemized deduction, but the TCJA has restricted itemized deductions for state and local income and property tax, reducing the dollar limited on acquisition debt regarding the mortgage interest deduction and eliminated the miscellaneous itemized deductions.  Additionally, the standard deduction amount has doubled.  The result is that charitable contributions won’t deliver the same level of benefit to many taxpayers, who won’t be claiming itemized deductions any longer on their returns.

Who is affected by the new tax law, TCJA?

But the TCJA didn’t touch one way for older individuals, specifically, those who are age 70 ½ or older and are taking required minimum distributions (RMDs) from IRAs, to come out ahead tax-wise when they make a charitable donation.  The key is to make annual contributions by way of a qualified charitable distribution from their IRAs, and to reduce RMDs by a commensurate amount.

Under the QCD rules, the IRA owner must be at least age 70 ½ to make the QCD to the charity.  Even a beneficiary of an inherited IRA can be eligible for a QCD, as long as the beneficiary themselves are at least 70 ½ on the date of the distribution.

The maximum dollar amount of a QCD from any individual from his/her IRA is limited to $100,000 per year.  These distributions aren’t included in gross income, can’t be claimed as a deduction on the taxpayer’s return, and aren’t subject to the general percentage limitations that apply for making charitable contributions.  The beauty of this is even though making a QCD from an IRA to a charity isn’t included in the taxpayer’s gross income, it is taken into account in determining the taxpayer’s RMD for the year.  This way an older individual who doesn’t need the income from their RMD, can use a QCD to take their RMD and meet that requirement, but not have to pay the tax on that income.

QCDs can only come out of traditional IRAs.  The can’t come out of a SEP IRA or Simple IRA plans.  Although it’s possible to take a QCD out of a Roth IRA, there’s generally no advantage in doing this because Roth IRA distributions are typically already tax-free.  The more tax-efficient move would be to use a traditional IRA to the fund the QCD.  In fact, if you have basis in a nondeductible traditional IRA, any QCDs you make are considered to come out of taxable funds first.  This is another advantage of the QCD, because normally distributions are split proportionately between taxable funds and nontaxable basis.

Can this strategy work for those who can still itemize?

The answer is yes, if the age 70 ½ or older taxpayer would be able to itemize even without claiming gifts to charity and has high medical expenses.  An amount (up to $100,000) paid out to a charity as a QCD instead of being received as a regular RMD reduces adjusted gross income (AGI) and may qualify the taxpayer for a higher medical expense deduction.  Under the TCJA, medical expenses can be claimed as an itemized deduction for 2018 only to the extent they exceed 7.5% of AGI.  This percentage will increase to 10% for 2019.  In addition, the reduced AGI may help avoid or reduce the effect of the 3.8% surtax on net investment income.

If you want more information or need assistance with creating a strategic plan in order to get the most out of your tax return, contact LSL Partner, Michael Agresti, CPA – Michael.Agresti@lslcpas.com or call (714) 672-0022 today!


Mike Agresti

Practicing since 1998, Michael decided to focus his practice on high net worth tax clients and closely held companies at LSL CPAs because of the complexity and multiple advisory needs. He not only provides tax planning and reporting, but he also consults on business strategic planning and has represented clients before tax authorities. He enjoys being available to clients for any business or personal financial questions. You can reach Mike at 714-672-0022. Read Mike's complete bio.