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Reducing Taxable Income for Seniors

 

One of the major changes in the Tax Cuts and Jobs Act of 2017 was that many seniors are going to lose out on the ability to itemize their deductions for 2018 and thereafter.

The Act limited the deduction for state and local taxes (SALT) to $10,000 per year.  SALT taxes include state income taxes, real estate taxes, and personal property taxes.  The act also did away with miscellaneous itemized deductions such as investment fees, safe deposit boxes, and tax preparation fees.

The Act also raised the standard deduction to $12,000 for single and $24,000 for married couples.  In addition, seniors (over age 65) get an additional $1,600 if single or $1,300 per spouse (over 65) if married. 

For married seniors, if both are over 65 the standard deduction is $26,600.  With the SALT deduction being limited to $10,000, coming up with the remaining $16,600 to be able to “Itemize” is difficult, as many seniors no longer have mortgages, and do not qualify for medical (if they are in good health), leaving charitable donations as the last option.

Here is a great tax planning opportunity to achieve BOTH a reduction of taxable income and use the standard deduction.  If the above fact pattern fits your situation, you are over 70.5 years old and taking the required minimum distributions (RMD) from your IRA, and you are charitably inclined, you should consider making a Qualified Charitable Distribution (QCD) from your IRA. 

A QCD is a distribution from your IRA that doesn’t go to you, it goes to a charity of your choice.  The law allows up to $100,000 of QCD per year.  The QCD is not considered income to you but meets your RMD requirement.  You will not get the charitable deduction for the QCD, but your overall taxable situation will be improved. 

Example:  Taxpayer has $100,000 of income from social security, interest, and pensions.  Taxpayer is also required to take a $12,000 distribution from their IRA as their RMD for the year. Below shows the impact of making a $12,000 QCD:

   

Traditional

 

Making a QCD

 

Income

 

      112,000

 

      100,000

 

Standard Deduction

 

        26,000

 

        26,000

 

Taxable Income

 

        85,400

 

        73,400

 
           

The tax savings in this example federally would be $2,240 or 18.6%.  There would also be a state tax savings, which in MA would be 5.1% or $612. 

Of course, there are other considerations to take into account (cash flow being a major one), but if you still have to take your 2018 RMD and you typically make end of the year charitable donations, this is a way to do both and save some taxes at the same time.

 
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Katz Nannis + Solomon PC
Katz Nannis + Solomon PC
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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