Unintended Consequences and an Underutilized Solution


Unintended Consequences and an Underutilized Solution

Whenever there is a significant change in the tax code, there are always unintended consequences. The Tax Cut and Jobs Act (TCJA) is no exception. While many people thought the new tax law created simplification and reduced corporate taxes, it might also create a dramatic and negative affect on charities.

 

A few reasons why:

  • The TCJA increased the standard deduction to $12,000 for singles and $24,000 for couples
  • Tax brackets were lowered, making all deductions less valuable
  • The federal estate exemption was raised to $22 million for couples, making charitable bequests less urgent for wealthy households

 

The Tax Policy Center estimates that the share of middle-income households claiming the charitable deduction will fall by two-thirds, from 17 percent to just 5.5 percent. Even larger incomes will see a significant drop of nearly 25 percent.1

 

Obviously, those households that are charitably inclined will continue to support their favorite charities. However, many Americans are motivated to make donations based on financial advantages. I want to point out that there are great opportunities to continue making charitable contributions that can impact the tax control of a retiree’s income – one such technique is the use of Qualified Charitable Distributions (QCDs).

 

Help Clients Give

QCDs allow for required minimum distributions up to $100,000 to be directed to a charity directly from the plan participant’s IRA. The distribution does not count as income – that’s a really important distinction. A deduction, most likely, would be taken off adjusted gross income with some limits. A QCD simply does not count as income.

 

This strategy creates cascading benefits – some key ones include:

  • The client can make a charitable deduction even if their contribution is under the standard deduction
  • QCDs do not increase combined income for Social Security taxation calculations
  • QCDs do not increase the Modified Adjusted Income for Medicare premium thresholds
  • The lower income may allow a client to “bracket bump” and convert other qualified funds in a lower tax bracket

 

The use of QCDs hasn’t been popular recently, but I can’t pinpoint why. Many planners haven’t used this strategy because the client was able to take a deduction above and beyond the standard deduction. Now, tax laws have changed, making it more difficult to make a charitable contribution the “traditional” way.

 

Winning Strategy

The tax law change should make you think and act differently. Talk to clients who are taking RMDs about changing their contribution to Qualified Charitable Distributions.

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1Tax Policy Center, TaxVox, “21 Million Taxpayers Will Stop Taking the Charitable Deduction Under The TCJA,” January 2018: https://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.