The Tax Cuts and Jobs Act, also known as the “Trump Tax Plan,” was signed into law in late 2017. Most of the provisions in the new law, however, become effective for the 2018 tax year, which begins on January 1, 2018.
That means you have time to consider new tax strategies in response to changes in the tax law. You may want to start with a big tax-saving rule regarding charitable contributions.
The Impact of the Standard Deduction Increase
Arguably the biggest change in the new tax law is an increase to the standard deduction. For a single taxpayer, it increases from $6,350 to $12,000; for married taxpayers, the standard deduction is now $24,000 – up from $12,700.
These changes will likely cause many taxpayers who previously itemized their deductions to now take the higher standard deduction. This is one of the ways the Tax Cuts and Jobs Act aims to reduce the overall tax for many Americans.
However, as many taxpayers move from itemized deductions to the standard deduction, one deduction that will be lost for many is charitable contributions. In other words, if you have been itemizing your deductions in the past but will now use the standard deduction, your charitable contributions will no longer be tax-free.
The Tax Benefit of Qualified Charitable Distributions
Fortunately, with a little planning you can still make tax-free charitable contributions, which can save you up to 37% of the amount you plan to give to charity. You can do this with Qualified Charitable Distributions. If you are an owner of an individual retirement account (IRA) who is age 70 ½ or older, you can directly transfer, tax-free, up to $100,000 per year to an eligible charity.
In addition to the tax savings, your contributions count toward your required minimum distributions.
What You Need to Do
To properly execute this strategy, you need to work with your financial adviser or IRA custodian. For the contribution to be tax-free, the funds must be sent directly from your IRA to your charity or charities of choice. You can’t just withdraw the money and then write a check. Further, the recipient charities must be registered as an eligible 501(c)(3) organization. Most reputable charities are registered as such, but if you don’t know simply contact them to find out.
Using this strategy is a fantastic way to support the charities you are passionate about while still achieving some nice tax benefits.
Michael Hohf is a CERTIFIED FINANCIAL PLANNER™ who provides comprehensive wealth management solutions, such as retirement planning and investment advice, to help clients work toward achieving their financial goals. He is also one of Dave Ramsey's designated SmartVestor investing professionals.