Among the many changes introduced by the Tax Cuts and Jobs Act of 2017, some have created great planning opportunities. One planning opportunity that we have reached out to proactively discuss with many of our clients is the significant increase in the Standard Deduction for married couples.
We have many married clients who are both charitably inclined and have very little mortgage interest to deduct. This creates a great opportunity for them to reduce their income tax liability. To illustrate the opportunity, let’s invent a sample client.
Mr. and Mrs. Sample are both over 70 and healthy, their house is paid for and they have an IRA.
- In 2017, their Standard Deduction was $12,700. Between their property tax and State tax deductions, they easily had enough deductions to itemize deductions, so the $15,000 which they gave to charity was a deduction against their income. They had $40,000 in taxable income due to the Required Minimum Distribution (RMD) from their IRA and the rest of their income was dividends from their joint account.
- In 2018, their Standard Deduction will be 24,000 and the State and Local tax deduction is limited to $10,000. If they gift in the same manner as last year, their itemized deduction will be $25,000. Their income will remain about the same, albeit with a larger RMD.
Because of the higher Standard Deduction in 2018, they have the opportunity to reduce their taxable income by $14,000.
Instead of taking their full RMD and making charitable gifts from their after tax dollars, they can direct their IRA to make a distribution directly to the charity. (a Qualified Charitable Distribution or QCD). By gifting from the IRA, the $15,000 is never treated as income so their taxable income is lower by $15,000 and by switching to the Standard Deduction; their deduction amount is only $1,000 lower, therefore a net reduction in taxable income of $14,000. Not only will this reduce next year’s tax liability, it may also reduce monthly Medicare premiums.
Note that while this planning opportunity is only available if the IRA owner is taking RMDs, there are other opportunities for those who are not yet 70. Let us know if you would like for us to review your tax situation for planning opportunities created by the new tax laws.