Wilmington-area nonprofits, like their counterparts across the country, are watching to see what happens to charitable contributions in 2018.
As part of its tax reform package passed in December, Congress nearly doubled the amount of the standard deduction. Starting with the 2018 tax year (taxes that will be filed next year), the new measure increases the standard deduction to $12,000 from the current $6,350 for single filers. For married couples filing jointly, the standard deduction increases to $24,000 from $12,700.
“The net effect: The percentage of filers who choose to itemize would drop sharply since the only reason to do so is if your deductions exceed your standard deduction,” Jeanne Sahadi wrote in a Dec. 22, 2017, piece for CNN Money.
Fewer taxpayers itemizing deductions means that fewer taxpayers will use charitable contributions as a way to reduce their tax burden. And that could be bad news for nonprofits of all stripes. For taxpayers 70ó and older who must take a Required Minimum Distribution (RMD) from their IRA, however, there is a way to take the standard deduction and make tax-exempt gifts as well.
“Because the government is making you pull [the RMD] out, they will also allow you to gift some of it directly to charity through what’s called a Qualified Charitable Distribution, or QCD,” said Jason Wheeler, CEO and wealth consultant with Pathfinder Wealth Consulting in Wilmington.
The new tax laws allow IRA owners to give as much as $100,000 each year from their traditional IRA to one or more nonprofits, say CPAs James R. Grimaldi, James A.J. Revels and Sidney Kess, writing in the CPA Journal’s January issue.
“To qualify as a QCD, distributions must go directly from the IRA trustee to an eligible charity. The IRA owner will neither report taxable income from the IRA distribution nor receive a charitable contribution deduction; the tax benefit here is that QCDs count as RMDs but are not reported as taxable income,” they wrote.
This provision is something even the under-70 set should consider for the future, say the authors. Because QCDs recently became a permanent tax benefit, younger taxpayers should begin planning now to use them advantageously.
“Younger IRA owners also may want to revise their plans,” they wrote. “One reason for converting a traditional IRA to a Roth IRA is to reduce future RMDs; however, it might be more tax efficient to keep money in a traditional IRA and plan to eventually use QCDs to trim RMDs.”
Wheeler said that people who tithe to their church can make lump-sum distributions to satisfy their pledge, as well as to make other charitable contributions.
QCDs can help seniors in other ways as well, he added.
“It’s good for folks who are no longer itemizing because they have paid off their mortgage and therefore can’t write off mortgage interest,” he said.
Meanwhile, some local charitable organizations are addressing the possible effects of the tax law change.
“We’re planning an event in March for our consistent donors, focused on planned giving, and we’ll also address provisions in the new tax law,” said Jane Birnbach, senior development director for Good Shepherd Center in Wilmington. “We’ll have an estate attorney and a financial planner on board.
“We haven’t quite figured out the ramifications [of the new tax law], but use of RMDs is something we push for,” she added. “What we’re finding already is that often, when people drop off donations of clothing or food, and we offer them a tax receipt, they’re telling us they don’t need a receipt – that it won’t do them any good. Will that mean we see less in financial donations? Gosh, I hope not.”