Passage of the Tax Cuts and Jobs Act in Late 2017 has impacted taxpayers who use itemized deductions to reduce their Federal taxes. In his article, MWB Attorney Harris Livingstain explains the challenges of the new law and offers advice on how to adjust to the new rules.
Harris tackles issues relating to estate planning, as well as trust and probate administration. His practice ranges from the very simple to very complex multi-generational estates where his focus is on estate and income tax reduction and asset protection. Harris also represents owners of closely-held or family businesses and assists them in succession to succeeding generations. Where appropriate, he also helps develop strategies for the sale of a family business to a third party. He has been successful in representing fiduciaries of estates and trusts in gift and estate tax audits.
Read his article below:
Use Your IRA Wisely in Post-Tax Reform
Changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) impacted the ability of many taxpayers to use itemized deductions to reduce their federal income taxes. The TCJA limited itemized deductions for state and local income and property tax, reduced the dollar limit on residential acquisition debt for the interest deduction on such debt, and eliminated the deduction for interest on home equity debt as well as miscellaneous itemized deductions. Although the TCJA nearly doubled the standard deduction, the net result for many of the charitably inclined is the lower tax benefit for charitable contributions for taxpayers who will no longer realize the benefit of itemizing in favor of the new standard deduction.
This bad news is somewhat offset by the qualified charitable distribution (QCD) that was not affected by the TCJA. Taxpayers who are age 70½ or older and are receiving required minimum distributions (RMDs) from IRAs may actually benefit more from a federal income tax perspective when they make a charitable contribution via the QCD.
By way of background, taxpayers must start taking annual RMDs from their traditional IRAs (as opposed to “Roth” IRAs) by April 1 following the year in which they attain age 70½, and failure to do so could expose the taxpayer to a penalty of 50% of the difference between the amount that should have been taken and the amount actually taken. If a taxpayer has more than one “traditional” IRA, the amount of each RMD is calculated separately for each IRA, but the annual required RMD is based on the aggregated RMD amount – which may be paid (in whole or in part) out from any of the IRA accounts.
In order to facilitate charitable contributions, QCDs permit an annual exclusion from gross income of up to $100,000 for otherwise taxable IRA distributions. Since such distributions aren’t included in gross income, the amount is also excluded as a deductible item on the taxpayer’s return. Consequently, the amount is not subject to the general percentage limitations that apply for making charitable contributions. However, although a QCD is not included in gross income, it is taken into account in determining the taxpayer’s RMD for the year.
One rule that often is overlooked is that a QCD must be made directly by the IRA trustee to the charity. Thus, a distribution made to the taxpayer pays over the amount to the charity is not a QCD, and thus is not excludable from gross income.
Who benefits; non-itemizers or itemizers? The answer can be both. In 2018, if a joint filer’s total itemized deductions, including charitable contribution deductions, will not exceed the standard deduction of $24,000 (or $18,000 for heads of household, and $12,000 for single filers (plus $1,300 for the elderly or blind, or $1,600 for a taxpayer who is unmarried and not a surviving spouse), the QCD reduces the taxable income tax (the benefit being the tax rate multiplied by excluded income). If the taxpayer would be able to itemize and has high medical expenses, the RMD otherwise received by the taxpayer but paid to charity via a QCD (not in excess of $100,000) reduces AGI and may qualify the taxpayer for a higher medical expense deduction. Under the TCJA, medical expenses can be claimed as an itemized deduction for 2018 only to the extent they exceed 7.5% of Adjusted Gross Income (the over 7.5% increases to over 10% for years after 2018).