Navigating Charitable Contributions Post-TCJA

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 and in effect from 2018 – 2025 has had a substantial effect on itemizing deductions. It had a two-pronged effect by:

1. Almost doubling the standard deduction amount, which raised the bar much higher to reach a point where it is advantageous to utilize itemized deductions; and
2. It reduced or eliminated many of the deductions themselves. State and local taxes (SALT) are limited to $10,000, while eliminating deductions for unreimbursed employee expenses, tax preparation fees, theft and casualty losses (except in a federally declared disaster area), and other miscellaneous deductions.

As a result, the percentage of taxpayers utilizing itemized deductions fell from 31% in 2017 before TCJA took effect to 9% in 2020.

These changes have impacted the tax consequences of making charitable contributions, especially for senior citizens. For 2024, the standard deduction for a married couple who are both over the age of 65 will be $32,300. Given these taxpayers usually don’t have much mortgage interest paid, if any, and with the SALT limit of $10,000, it’s difficult for these individuals to reach the threshold where it makes sense to itemize. Unfortunately, for those taxpayers who make significant charitable contributions each year, anywhere from $1,000 to $20,000, they really don’t receive a tax benefit for doing so.

A remedy to this can be to use Qualified Charitable Distributions (QCD) from an IRA account. The Pension Protection Act of 2006 allows individuals over the age of 70 ½ to make contributions directly to a qualified charity, excluding the distribution from income.

For example, a taxpayer is in the 22% tax bracket doesn’t have enough deductions to itemize and makes a $15,000 charitable contribution during the year. If the taxpayer is utilizing taxable income to make the contribution, the taxpayer will pay $3,300 of tax (15000 x .22) on the income that they gave to charity. By utilizing a QCD, the taxpayer can make the contribution from an IRA and exclude the income from tax, saving $3,300 in tax.

For tax reporting, the taxpayer must get a receipt from the charitable organization acknowledging the payment received from the IRA. There isn’t a code for a QCD on the 1099-R to let the IRS know it was made, so it’s important to retain any documentation, such as receipts, to provide to your tax preparer.

To disburse a QCD payment, the taxpayer needs to contact the bank or investment firm holding their IRA and make arrangements to have the specified amount(s) disbursed directly to the charity in whatever cadence they’d like. Typically, the charity sends a letter in January acknowledging the amounts received from the IRA account. Additionally, the financial institution holding the IRA will have statement(s) showing the distributions with the charity listed as the recipient.