By Alison C. D. Brooks, CFP, CRPC
Brooks is Co-Founder & Chief Operating Officer | Private Wealth Advisor at Brandywine Oak Private Wealth, Kennett Square
The new 2018 tax law has left many Delaware and Pennsylvania residents uneasy about their previous charitable donation strategy as many taxpayers will no longer itemize their deductions. Taxpayers who are over age 65 receive an extra standard deduction of $1,300 per spouse, resulting in a married couple who is in their 70’s with a whopping $26,600 standard deduction. This makes itemizing deductions even more unlikely and many clients are asking us why bother giving to charity anymore at all?
Many of our Delaware and Pennsylvania clients regularly donate to local charities such as the United Way of Delaware or Southern Chester County, the American Red Cross in Wilmington, or the Brandywine or Kennett Area YMCA and would like to continue donating to these organizations while still receiving a tax benefit.
A tax strategy that was made permanent under President Obama in 2016 was the Qualified Charitable Distribution (QCD) strategy. This strategy applies to those taxpayers who are over age 70½ and have required minimum distribution obligations (RMDs) from their retirement plans. The QCD strategy only applies to required minimum distributions from IRAs and does not apply to RMD obligations from employer-sponsored retirement plans such as 401(k) or 403(b) plans. The QCD technique involves a taxpayer donating up to a maximum of $100,000 from their IRA to their favorite charity or charities and avoiding all Federal income taxation on what is distributed to charity.Regardless of whether this taxpayer itemizes their deductions, the QCD provides a hard dollar Federal tax savings and a compelling above-the-line tax deduction.
Many of our clients are retirees of local corporate conglomerate DuPont Corporation, who after age 70½ have sizable required distributions from their pre-tax IRAs. The required distributions are often in excess of what the client needs for lifestyle and the taxable RMDs often result in a higher marginal tax bracket and an increased cost of Medicare Part B and D due to their increased income.
Medicare Part B and D premiums are based on a taxpayer’s modified adjusted gross income (i.e., their adjusted gross income plus any tax-free bond interest from municipal bonds) from two years prior. If a taxpayer was previously making $10,000 in charitable donations from cash and itemizing under the old tax law, it might be tax-advantageous for him or her to make the same $10,000 charitable donation from his or her IRA directly to charity.This would in effect reduce the taxpayer’s adjusted gross income and thereby reduce the amount of income subject to the calculation for Medicare Part B and D premiums.
In addition to Medicare Part B and D, a taxpayer’s adjusted gross income also determines how much of their Social Security benefit is taxable, as well as how much out-of-pocket medical expenses he or she can deduct as the itemized medical deduction is over and an above an adjusted gross income hurdle.
Retirees of DuPont and other large corporations often have a limited ability to reduce their adjusted gross income because their pension is fixed, Social Security increases marginally each year, and they have very little in the way of above-the-line tax deductions. Herein lies the value of the QCD strategy which is one of the most attractive strategies that exists in the tax code at reducing a taxpayer’s adjusted gross income.
Of course, before implementing tax and charitable strategies one should consult with a tax advisor first as the rules can be