Among the many familiar aspects of taxation that the recently enacted tax bill changed is the standard deduction. With its increase to $12,000 for individuals and $24,000 for married couples, a lot of taxpayers will soon find the expenses they typically paid and itemized will no longer be deductible.
The most common of them are mortgage interest; state, local and real estate taxes; and charitable donations. If these items total less than the new standard deduction, you would get no additional tax benefit for paying them.
However, in the case of charitable giving, you can still make donations that will reduce your taxable income dollar-for-dollar, even if you don't have enough other expenses to exceed the standard deduction. Here's how, and who can do it.
If you're required to take minimum withdrawals from an IRA or retirement plan because you're age 70 ½ or older, you can use the pretax dollars in your IRA to make donations to a nonprofit, religious organization or other qualified charity.
This is called the IRA Qualified Charitable Distribution rule, and it allows IRA account owners who are subject to the required minimum distribution (RMD) rules to use untaxed money in an IRA as a donation to a charity tax-free. The rules require that the money distributed be directly transferred to a charitable organization, and they set a dollar limit of up to $100,000 per year.
Also, you can't claim the charitable deduction for the same contribution on your tax return (sorry, no double-dipping). The IRA Qualified Charitable Distribution had been a temporary provision that was permanently extended under the new tax law.
Those who want to do this in 2018 will need to make sure to not make charitable donations from their other funds and plan now to direct some of their RMDs to charity before year-end. Note, this provision doesn't apply to a Roth IRA, which has tax-free withdrawals and no RMDs.
The money withdrawn from an IRA and donated to charity stays out of your adjusted gross income only if you make a direct transfer from your account to the charity. It doesn't qualify as a tax-free transfer if you withdraw the money first, deposit it into another account and then donate to the charity.
For example, for IRAs held at Fidelity, you have several options. If you have check-writing privileges on your IRA, you can write a check directly from the IRA to the charity. You can also use a Fidelity form to have money sent to the charity directly from your account. Fidelity recommends submitting the form no later than the end of November to allow enough time for processing before year-end.
If Fidelity sends a check, it will be written out to the charity and include your name. Let the charity know to expect the donation and provide your address so it can send you an acknowledgement for your tax records.
Another option is to have Fidelity make the check out to the charity and send it to your home address so you can forward the money to the charity yourself.
Vanguard requires that you either fill out a form or call to request the transfer for the donation to count as a qualified charitable donation. Vanguard makes the check out to the charity and sends it to you to forward.