The Tax Cuts and Jobs Act is in effect. You can help clients take advantage of tax savings with their IRAs —this is why they have you as an adviser.
As far as tax savers go, this one is simple. Use qualified charitable distributions (QCDs) to maximize the new higher standard deduction. But just because it's so simple, doesn't mean it won't have a big impact; it will, and it will also boost your value to your clients — and their CPAs.
The New Standard Deduction
The new law doubles the standard deduction to $12,000 per person and $24,000 per couple. Many of your clients, and probably you, too, will now be claiming the standard deduction.
The QCD provision allowing direct rollovers from an IRA to a charity has been a permanent provision in the tax law since 2015. But most clients who qualify are still not taking advantage of it.
You can, and you should be helping all of your clients who qualify, optimize the benefit of this tax saver. The QCD can effectively expand the increased standard deduction amounts and result in big tax savings.
QCDs were not changed under the new law but their impact has changed. QCDs have been made more valuable than ever and every client who qualifies should be making their donations using them.
Since many clients may not have enough charitable, medical or other remaining deductions that survived tax reform to itemize, they will use the standard deduction.
But that amount can be increased. The QCD can actually add to the standard deduction resulting, in effect, in getting the standard deduction plus the charitable deduction.
Not all clients qualify for QCDs, so focus on the ones who do. The QCD only applies to IRA owners and beneficiaries who are 70 ½ or older. The donation must be directly transferred from the IRA to the charity and nothing can be received in return for the donation. Gifts to Donor Advised Funds or private foundations do not qualify. The per-year limit is $100,000 per person, so that should be enough for most of your clients.
In addition, if your client is a married couple who both qualify for the QCD and have IRAs subject to required minimum distributions (RMDs), they can each use the QCD and increase the tax benefit of their giving.
A tax deduction for the contribution cannot be taken, but the amount transferred from the IRA is excluded from income and it counts toward the RMD. Excluding that amount from income is a better tax benefit than receiving a tax deduction, because it keeps income lower. This allows more AGI–based tax benefits, resulting in a lower tax.
Michael G. Thompson, a Partner at Galligan Thompson & Flocas in San Mateo, Calif., provides a simple but effective example that you should show to all of your clients who can benefit from this.
This chart depicts a married couple over 70 ½ who have paid off their home. Any other allowable deductions were not high enough to itemize, given the new higher standard deduction of $24,000 for this couple.
|Not using a QCD||Using a QCD|
|Income before IRA||$200,000||$200,000|
|State & property taxes||$10,000||$10,000|
|Interest paid -none||-||-|
|Taxable Income Difference||$10,000|
Now you see why you should be getting this message out to clients. The tax savings can be much larger for clients who give more and who are in a higher tax bracket, and even more for a married couple who can both give from their IRAs.
Advisers should also be contacting charities to show them this and maybe even help them create a program to get more of their supporters on board. This is something that will be good for the charities, good for your clients and a great business builder for you as an adviser with good ideas!