Ed Slott: Make Your Charitable Gifts Count at Tax Time

Key Concepts

• State and Local Tax (SALT) Deduction: A deduction for state and local taxes paid by individuals.
• Itemized Deductions: Specific expenses that taxpayers can deduct from their taxable income.
• Standard Deduction: A fixed dollar amount that reduces taxable income, taken by taxpayers who do not itemize.
• Qualified Charitable Distribution (QCD): A tax-efficient way for individuals aged 70½ or older to donate to charity directly from their IRA.
• Required Minimum Distribution (RMD): The minimum amount that IRA owners must withdraw annually from their retirement accounts starting at a certain age.
• Contemporaneous Written Acknowledgement (CWA): A receipt from a charity confirming a donation and stating that no goods or services were received in return.
• Adjusted Gross Income (AGI): Gross income minus certain deductions.
• Non-Itemizers Deduction: A deduction available to taxpayers who do not itemize their deductions.

Impact of Tax Law Changes on Charitable Giving

1. Increased Likelihood of Itemizing in 2025

• Background: Prior to the Tax Cuts and Jobs Act, the deduction for state and local taxes (SALT) was unlimited. The Act capped this deduction at $10,000, causing over 90% of taxpayers to take the standard deduction as their total itemized deductions fell below this threshold.
• Change for 2025: The "One Big Beautiful Bill Act" has raised the SALT deduction limit to $40,000, effective for 2025.
• Implication: This increase in the SALT deduction is expected to bring many more taxpayers into the "itemizers club." This allows them to combine the higher SALT deduction with other deductions such as charitable contributions, mortgage interest, and medical expenses, potentially leading to a more favorable tax outcome.

2. Qualified Charitable Distributions (QCDs) - An Evergreen Strategy

• Eligibility: QCDs are available to IRA owners and IRA beneficiaries who are 70½ years old or older. This age requirement remains at 70½, even though the RMD age has increased to 73.
• Mechanism: A QCD is a direct transfer of funds from an IRA to a qualified charity.
• Tax Benefit: The funds transferred via QCD are not taxed. This is particularly beneficial for individuals who are charitably inclined and would otherwise be making cash contributions.
• IRA as the Best Asset for Charity: IRAs are considered the most tax-efficient assets to donate to charity because they are "loaded with taxes." Donating from an IRA via QCD avoids income tax on the distribution.
• Offsetting RMDs: A QCD can effectively offset a taxpayer's Required Minimum Distribution (RMD). For example, if an individual's RMD is $5,000 and they make a $5,000 QCD, the RMD is considered satisfied, and no income tax is due on that amount.
• Timing is Crucial: To ensure the QCD satisfies the RMD, the QCD should be initiated before taking the RMD. This is especially important as the end of the year approaches.
• Documentation: Taxpayers must obtain a "contemporaneous written acknowledgement" (CWA) from the charity. This CWA serves as a receipt, confirming the donation and stating that no goods or services were received in return for the contribution. This documentation is essential for substantiating the QCD.

Looking Ahead to 2026: Significant Changes for Charitable Giving

1. Potential Reduction in Tax Benefits for Higher Earners

• Deduction Limitation: For 2026, the tax benefit of charitable deductions for individuals in the highest tax bracket (37%) will be limited. Instead of receiving the full 37% benefit, the deduction will be capped at 35%.
• SALT Deduction Income Limit: The $40,000 SALT deduction has an income limit. For married couples filing jointly, this limit is around $751,000 to be in the 37% bracket. Taxpayers with incomes significantly above this threshold may not qualify for the full SALT deduction, and thus may not be in the 37% bracket for the SALT deduction itself. However, if they have other large deductions and are in the 37% bracket due to their overall income, the charitable deduction benefit will be clipped.
• AGI Floor: Additionally, for all taxpayers, charitable contributions in 2026 will be subject to a floor of 0.5% of their Adjusted Gross Income (AGI). For example, if a taxpayer has an AGI of $200,000, 0.5% is $1,000. If they donate $1,500, only $500 would be deductible, as the first $1,000 is subject to the floor.

2. "Bunching" Charitable Contributions in 2025

• Strategy: Due to the potential limitations in 2026, it may be advantageous for individuals to "bunch" or accelerate their charitable contributions into 2025. This strategy allows them to maximize the tax benefits of their giving in the current year, especially if they are charitably inclined and expect to be affected by the 2026 limitations.

3. New Deduction for Non-Itemizers in 2026

• Availability: Starting in 2026, a new deduction will be available for taxpayers who do not itemize their deductions.
• Benefit: This deduction will allow non-itemizers to deduct up to $1,000 for individuals and $2,000 for married couples filing jointly.
• Implication: This provides a tax benefit for those who do not meet the threshold for itemizing, even if they do not make significant charitable contributions. For example, a married couple filing jointly who don't itemize and don't donate $2,000 could still receive a $2,000 deduction.

Synthesis/Conclusion

The landscape of charitable giving is significantly influenced by evolving tax laws. For 2025, an increase in the SALT deduction limit is expected to encourage more taxpayers to itemize, making their charitable contributions more tax-relevant. The Qualified Charitable Distribution (QCD) remains a powerful tool for individuals aged 70½ and older to donate tax-efficiently from their IRAs, with careful attention to timing and documentation being crucial. Looking ahead to 2026, potential limitations on the tax benefit of charitable deductions for higher earners and the introduction of an AGI floor may prompt some to accelerate their giving into 2025. Conversely, a new deduction for non-itemizers in 2026 offers a benefit to a broader range of taxpayers. Navigating these changes requires careful planning and an understanding of individual circumstances to maximize tax advantages.