If you are 70 and ½ years of age, you are required to take minimum distributions (RMD) from your IRAs or else pay penalties. This RMD is then treated as taxable income to you. Under the new tax law passed in December 2017 and effective beginning January 1, 2018, the standard deduction has been increased to $24,000 for a married couple, $18,000 for a head of household, and $12,000 for an individual. The law also places limits on certain itemized deductions, such as mortgage interest and state tax deductions. Therefore, most people who previously itemized will now be taking the new, higher standard deduction which means they will no longer directly benefit, from a tax perspective, for making charitable gifts.
If you are charitably-minded, the result of this new law is not satisfactory. Assume (even after accounting for your annual $5,000 gift to your church) your itemized deductions are less than the standard deduction, your RMD is $5,000, and that you are in a 30% tax bracket. In satisfying your RMD, $5,000 is added to your taxable income (which at a 30% tax rate generates an additional $1,500 in income tax). Further, because you will be incentivized to take the larger standard deduction, you receive no charitable deduction for your church gift. As a result, the IRS collects $1,500 more in taxes and you have $1,500 less to use as you want.
Instead, if you directed the trustee or custodian of your IRA to send $5,000 (the annual limit is $100,000) directly to your church, the gift does satisfy your RMD, avoids the penalties for not taking your RMD, while also avoiding the $5,000 addition to your taxable income! Put another way, (1) your RMD is satisfied, (2) your church receives the same $5,000 it always has, and (3) you do not pay any income taxes on the $5,000! This strategy takes the additional $1,500 in taxes away from the IRS and places it back in your pocket. In this example, the taxpayer can save $1,500 in income taxes by a simple direction to their IRA trustee or custodian.
Please consider this optimal giving strategy, both this year and in the years to come under this new tax law. Happy giving.