This post was updated on July 8, 2022.
The Tax Cuts and Jobs Act of 2017 has been in effect for a few years now, and while a lot of things have changed, there are still plenty of opportunities to maximize your tax-deductible charitable contributions. One of the biggest opportunities is your retirement account.
You can use your retirement account to maximize the tax benefit of your charitable contributions in one of two ways: by making a charitable IRA rollover or by naming Plan International USA as a beneficiary on your retirement account. Keep reading to learn about the specific benefits of each of these choices.
If you qualify, a charitable IRA rollover will decrease your taxable income, meaning you will probably pay less in taxes. In order to give to Plan through a charitable IRA rollover account, you:
— Must be age 70 1/2 or older in the year you make the gift.
— Must transfer funds directly from an IRA to a qualified charity, such as Plan.
— May transfer up to $100,000.
Individuals who are age 70 1/2 or over are required to take a Required Minimum Distribution (RMD) from their IRA each year. This RMD is calculated based on the balance in your IRA at the beginning of the year and your age. RMDs become taxable income when they are distributed.
Since the Tax Cuts and Jobs Act of 2017, many formerly deductible expenses no longer qualify for a deduction. However, charitable contributions are still tax-deductible to taxpayers who itemize. What has changed is that the standard deduction for single taxpayers has increased. Because the standard deduction has increased, most taxpayers will not be itemizing their deductions this year.
Let’s see how this impacts a taxpayer’s tax bill:
Anna is an 80-year-old single taxpayer who has a $50,000 annual income. She pays $3,000 in state and local taxes that are deductible if she itemizes her deductions on her tax return. She is required to take a $5,000 RMD, and she would like to use that money to make a gift to The WHOLE Girl Fund at Plan in support of ending systemic gender inequality and girls’ oppression.
In 2017, Anna took her $5,000 RMD (which is taxable), making her gross taxable income $55,000. When she filed her tax return for 2017, she was able to deduct her state and local taxes ($3,000) and her contribution to Plan ($5,000), making her total deductions ($8,000) higher than that year’s standard deduction of $6,350. Because itemizing her deductions will save her money, she opts to do that and subtracts her total deductions from her gross taxable income. She is left with a net taxable income of $47,000 for 2017.
Now, Anna has two options:
Anna takes her $5,000 RMD as usual, making her gross taxable income $55,000. She pays her state and local taxes and makes her contribution to Plan, just like last year. When she files her tax return, she will find that her total deductions ($8,000) are not higher than the 2022 standard deduction of $12,950. She sees that itemizing her deductions will not save her money this year, so she decides to take the standard deduction instead. She subtracts the standard deduction from her gross taxable income and is left with a net taxable income of $42,050.
That is good news because her taxable income is lower than last year. But there is an even better option!
Anna decides to use a charitable IRA rollover to make her gift to The WHOLE Girl Fund. She instructs her IRA administrator to transfer $5,000 from her IRA account directly to Plan. By doing this, she has satisfied her RMD without adding that amount to her taxable income. She does not get a tax deduction for that $5,000. Her gross taxable income is now $50,000. When she files her tax return, she finds that, just like in Option A, her total deductions ($3,000) are not higher than the standard deduction of $12,950. She sees again that itemizing her deductions will not save her money and she decides to take the standard deduction instead. She subtracts the standard deduction from her gross taxable income and finds that her net taxable income is now $37,050.
Like in most cases, Anna’s tax bill is not going up because she did not itemize her charitable contributions. She can save even more money, though, by taking advantage of the charitable IRA rollover to make the gift to Plan in support of girls’ rights that she was always planning to make. This leaves more money available to Anna to do what she enjoys most.
Would you like to learn more about maximizing your retirement accounts to make your charitable gifts possible? The team of planned giving professionals at Plan is here to help you, so don’t hesitate to reach out to us. Please consult your tax adviser to determine the appropriateness of any charitable gift.