New tax law favors charitable giving from IRAs

Jamie Hopkins, associate professor of taxation at the American College of Financial Services, offers guidance

Jan 3, 2018 @ 11:29 am

By Greg Iacurci

InvestmentNews has asked readers to submit their tax questions. Here are three new submissions. If you would like your tax questions answered, please write to assistant managing editor Chris Latham at and reporter Greg Iacurci at

QUESTION: Has my ability to make direct charitable donations from my IRA when I reach the age of 70 1/2 been affected by the new tax law?Connie Beroza, 69-year-old retiree, Buffalo, N.Y.

ANSWER: In short, the strategy of donating to charities directly from an IRA after age 70 1/2 is still around under the new tax laws. The qualified charitable distribution (QCD) has been around for years, but was only codified as a permanent law a few years ago. A QCD allows those age 70 1/2 to give money to charities directly from their IRAs in a tax advantageous manner. This allows IRA owners who have attained age 70 1/2 to distribute money directly from the IRA to a qualified charity. Total annual QCDs from all IRAs cannot exceed $100,000 for an individual. Spouses can each make up to $100,000 of QCDs.

Making a QCD as opposed to a normal charitable gift has two main advantages. First, a QCD counts toward satisfying the individual's required minimum distribution for that year. Second, the distribution is excluded from the taxpayer's income. It is this second benefit that really shines under the new tax bill. With very few individuals expected to itemize (some estimates say around 5% of filers), the income tax deduction for contributions to charities will be lost for many people. However, if you make a QCD, you get a full exclusion of that income from taxes. So, for any retiree that is 70 1/2 or older, owns an IRA subject to RMDs, and is charitably inclined, a QCD really works out as a way to preserve an income-tax-reducing charitable deduction under the new tax law. — Mr. Hopkins

(More: Your tax bill questions answered)

Q: Can I still get the home mortgage interest deduction if I refinance my home mortgage to include a home equity line of credit (HELOC) balance as well? I owe about the same on the HELOC as I do on my first mortgage. Timothy D. Forester, CPA

A: Under the old law, most borrowers could deduct interest on the first $100,000 of "home equity indebtedness." This was a separate deduction from the very popular mortgage interest deduction — that focused on "acquisition indebtedness," which allowed most borrowers to deduct interest on the first $1 million of home acquisition indebtedness. The new tax law immediately eliminates the deductibility for any "home equity indebtedness." Starting in 2018, interest on home equity indebtedness is no longer deductible. For home acquisition indebtedness, the cap was lowered from $1 million to $750,000. Additionally, the new limitation only applies to new mortgages taken out after Dec. 15, 2017. Furthermore, a refinancing of existing acquisition indebtedness mortgages keeps the old limit of $1 million, but only for the remaining debt balance, not any additional debt taken out.

As such, the distinction between "acquisition indebtedness" and home equity indebtedness is crucial. It is not based on the type of loan, but is based on how the loan is used. "Acquisition indebtedness" is defined as any indebtedness "which is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence." Home equity indebtedness is essentially any other indebtedness other than acquisition indebtedness that is still secured by the qualified residence of the taxpayer.

So where does that get us? If you have an existing home equity indebtedness that was subject to the previous $100,000 limit, you cannot deduct interest anymore. Let's say you have a $500,000 house with a $100,000 traditional mortgage you took out to purchase the home, and later set up a HELOC to borrow an additional $75,000 for a purpose other than improving or buying the home. The interest on the $75,000 HELOC is no longer deductible under the new bill. Additionally, if you refinance the original $100,000 mortgage and take another $75,000 to pay off the HELOC, only the interest on the original $100,000 remains deductible, even after the refinance. The other $75,000 still remains home equity indebtedness. — Mr. Hopkins

(More: Everything financial advisers need to know about the final tax bill)

Q: Could you comment on what is (or is not) changing regarding deductibility of student loan interest and any of the tax benefits for college students and/or their parents? Charlie Knutson, business program manager at Ameriprise Financial, Minneapolis, Minn.

A: There were proposals in different forms of the tax bill that would have repealed popular benefits like the student loan interest deduction. However, almost no major changes to educational tax reform made the cut in the final tax bill. One small change was that student loan forgiveness as a result of death or disability is no longer treated as taxable income. Otherwise, the deductibility of student loan interest remains.

Perhaps one of the best things about the student loan interest deduction is that it is treated as an adjustment to income, so you do not need to itemize your deductions on Form 1040 in order to take advantage of the benefits. This is important under the new tax law because very few people will be itemizing. As such, the student loan interest deduction remains a valuable tax saving deduction for those straddled with student loan debt. — Mr. Hopkins


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