Charitable IRA rollovers may gain traction under tax reform

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 12/06/18


With new limits on itemized deductions set by the Tax Cuts and Jobs Act, some investors are considering how they will handle charitable donations in their tax filing this year.

Generally, in order to claim a charitable deduction, investors must itemize on their tax returns. But the tax reform law also nearly doubled the standard deduction, which is expected to result in fewer taxpayers itemizing. In fact, it is anticipated that roughly 90% of filers will use the standard deduction for their 2018 taxes (Tax Foundation). Taxpayers claiming the standard deduction will not receive a tax benefit for charitable gifts.

When retirees do not rely on RMDs

Investors are required to take required minimum distributions (RMDs) from their retirement accounts after age 70½. Yet many wealthy retirees find they do not need an RMD to pay for daily expenses. A recent study found that 88% of wealthy adults, age 65 to 75, were familiar with RMDs but 80% said they do not need the money for living expenses.

Individuals who do not rely on RMDs for income in retirement may consider a provision that allows IRA owners to withdraw from their account tax free (up to $100,000 annually) if funds are directed to a qualified charity. The so-called "charitable IRA rollover" provision is also available to individuals who inherit an IRA, provided that they are at least 70½ years old.

Other benefits for using an IRA for charitable gifts

  • Charitable deductions are limited by a taxpayer’s income — generally up to a maximum of 60% of modified adjusted gross income. By directing your IRA distribution to a charity, you can avoid this restriction.
  • If reporting additional income on your Form 1040 increases your Medicare Part B premiums or negatively affects the taxability of your Social Security benefits, then making a charitable contribution from your IRA may be appropriate.
  • Some states do not allow residents to deduct a charitable contribution. Making a donation to a charity directly from an IRA may provide a way to effectively claim a state tax deduction. Investors should consult a tax professional for state-specific guidance.
Consult an advisor for tax planning ideas

Investors who are wondering about itemizing their charitable donations or using the IRA charitable strategy should discuss the idea with a financial advisor or tax expert before taking action. In addition, read Putnam’s investor education piece, "Donating IRA assets to charity," for more information.

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