Older clients don’t need to itemize to get this charitable tax break

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Clients who are used to enjoying a tax cut because of their charitable giving may require a little extra assistance this year when it comes to planning their donations.

The new GOP Tax Cut and Jobs Act is in full effect, which means that though clients’ tax rates could drop, because of expanded tax brackets and higher standard deductions, the tax breaks to which they are accustomed may no longer be applicable.

To claim a deduction for charitable giving, a client must itemize his or her taxes. But with the standard deduction jumping from $6,350 for singles and $12,700 for married couples filing jointly in 2017 to $12,000 for singles and $24,000 for married couples, many clients may find that it doesn’t make sense to itemize anymore, and they may simply forgo the deduction from their philanthropic efforts.

“The impact of itemized deductions has been limited, and we will see fewer people itemize,” says Robert Westley, a CPA and member of the American Institute of Certified Public Accountants’ personal financial specialist credential committee.

“This means advisors need to help clients plan better,” says Westley, who is also a second vice president and financial planner at Northern Trust in New York.

But older clients can use a clever workaround that allows them to take the standard deduction and still get a tax break for their giving, he says.

Those over age 70 1/2 who have a traditional individual retirement account must take required minimum distributions from their account each year. They don’t, however, have to withdraw that money and put it into their own savings.

Instead, they can direct that RMD amount to a charity.

By making a qualified charitable distribution from their IRA account, clients can satisfy their RMD requirements and lower their tax liability.

Clients can donate up to $100,000 each year from their IRA directly to a qualified 501(c)(3) charity. They can’t direct the funds to a donor-advised fund or private foundation and reap the same tax savings.

The same goes if they withdraw the funds into their own bank account and then donate it. It will simply be treated as a standard donation, and the client will need to itemize to receive a tax discount.

Of course, clients can’t double dip either and count a QCD as a charitable deduction.

Donating through QCDs reduces the taxable amount of a client’s IRA distribution, because they won’t owe on any donated funds.

The QCDs will lower both adjusted gross income and taxable income, which could be crucial if a client’s RMD would push them into a higher tax bracket or if the additional income would increase their Social Security taxation, raise Medicare premiums or reduce eligibility for certain tax credits and deductions, Westley says.

“Giving away RMDs is a no-brainer for just about every client,” says Juan Ros, a CFP and vice president of Lamia Financial Group in Thousand Oaks, California.

Generally, clients can only make QCDs from an IRA, but those with SEP or SIMPLE IRAs can take advantage, too, if those plans are inactive, Westley says.

Clients taking RMDs from a 401(k) account could take advantage of this tax move as well, but they must first roll the 401(k) account into an IRA.

Clients must speak to their IRA custodian about making any QCD and inform them of which nonprofit they would like to gift before taking an RMD. Those automatically taking RMDs may want to opt of that system, so that they direct a portion or all of that RMD to become a QCD instead.

Finally, remind clients to inform their CPA or tax preparer about their QCD, because IRA custodians are not required to identify the transaction as such on the annual 1099-R form, and it could be reported as a usual RMD.

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