DOES A QUALIFIED CHARITABLE DISTRIBUTION MAKE SENSE THIS YEAR?
A unique provision in the tax code allows certain retirees to avoid tax on transfers made directly from a traditional IRA to a qualified charitable organization. Although one of the main attractions of a qualified charitable distribution (QCD) has been negated for 2020, there are still several viable reasons for making a QCD this year.
At the same time, charities that are in dire need of funding during the COVID-19 pandemic will greatly appreciate your generosity.
The back story
Normally, distributions from traditional IRAs are taxable at ordinary income tax rates, currently reaching as high as 37%. If you take money from an IRA and donate it to a qualified charity, it’s deductible on your annual tax return if you itemize deductions. Thus, these actions may cancel each other out. Non-itemizers who claim the standard deduction receive no tax benefit. (For 2020, a limited charitable deduction of up to $300 is available to non-itemizers.)
With a QCD, you avoid the middleman. So long as certain requirements are met, the transfer isn’t treated as a taxable distribution. Thus, you won’t be taxed on the amount, but you can’t deduct the contribution, either.
To qualify for this special tax treatment, you must be at least 70½ years old at the time of the transfer. In addition, the maximum annual QCD allowed is $100,000 per taxpayer. A married couple can double this amount to $200,000.
Be aware that certain charities — including donor-advised funds, private foundations and supporting organizations — aren’t eligible to receive QCDs. Also, Roth IRAs may be used for QCDs, but there’s no advantage to it
But that’s not the end of the story.
Revised rules for RMDs
Significantly, a QCD also counts as a required minimum distribution (RMD) from an IRA. This is often cited as the main reason for arranging QCDs.
Participants in traditional IRAs must begin taking RMDs by April 1 of the year following the year in which they turn age 72. They must continue RMDs in each succeeding year. The RMDs are based on life expectancy tables and the value of the account on December 31 of the prior year.
Previously, the required beginning date (RBD) was based on age 70½, but the Setting Every Community Up for Retirement Enhancement (SECURE) Act pushed back the RBD, beginning in 2020. Thus, under the SECURE Act, you would normally have until April 1, 2021 to take your first RMD if you turned age 72 in 2020.
The RMD rules also apply to beneficiaries who’ve inherited traditional IRAs. But mandatory lifetime distributions aren’t required for participants in Roth IRAs. (Roth IRA beneficiaries must empty out their account under special rules.)
The Coronavirus Aid, Relief and Economic Security (CARES) Act, with additional IRS guidance, suspends the RMD rules for 2020. Furthermore, this waiver extends to all beneficiaries of IRAs. So you don’t have to take any RMDs for 2020 if you don’t want to receive the money and don’t need it.
This change dilutes the benefits of using QCDs. In fact, some might even say there’s no reason to do it at all this year.
But there’s still more to the story.
Benefits of QCDs in 2020
Granted, a QCD won’t count as an RMD in 2020, because there’s no requirement to take distributions this year. However, there are other factors to consider.
For starters, taxpayers who’ve itemized in the past may now be claiming the standard deduction instead, due to numerous changes in the Tax Cuts and Jobs Act (TCJA) for 2018 through 2025. The TCJA reduced or eliminated several deductions. Using a QCD effectively “adds on” to the standard deductio