The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call from a financial advisor in South Dakota is representative of a common inquiry related to charitable giving. The advisor asked:
I have a client who consistently has made Qualified Charitable Distributions (QCDs) for the last several years and wants to make another for 2020. Are they still available even though required minimum distributions (RMDs) are suspended for 2020?
Highlights of the Discussion
- Yes, any clients who are an “eligible IRA owner or beneficiary” can still make a QCD for 2020 if they are eligible and do so by Dec. 31, 2020. While the gift will not have the added benefit of counting towards an RMD for the year (since none are due pursuant to the CARES Act), the client will still be able to exclude the QCD from taxable income and have the satisfaction of supporting a good cause. Because the QCD reduces taxable income, other potential benefits may result; for example, a person may be able to avoid paying higher Medicare premiums. Note that for those who make both QCDs and deductible IRA contributions in the same year, new rules as a result of the SECURE Act may limit the portion of a QCD that is excluded from income.
- An eligible IRA owner or beneficiary for QCD purposes is a person who is age 70½ or older and has assets in traditional IRAs, Roth IRAs or inactive SEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. “Inactive” means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
- A QCD is any otherwise taxable distribution (up to $100,000 per year) that an eligible person directly transfers to a “qualifying charitable organization.” QCDs were a temporary provision in the Pension Protection Act of 2006. After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
- Generally, qualifying charitable organizations include those described in IRC §170(b)(1)(A) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor-advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool, Tax Exempt Organization Search, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions. Note that a taxpayer would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD.
- Changes under the CARES Act made charitable giving more complicated in 2020. In addition to the above information on QCDs, the CARES Act created a new above-the-line deduction of $300 for charitable contributions, and allows for cash gifts to most public charities of up to 100% of adjusted gross income in 2020. Because of the added complexity, seeking the advice of a tax professional regarding charitable giving would be the best course of action.
- Where an individual has made nondeductible contributions to a traditional IRA, a special rule treats amounts distributed to charities as coming first from taxable funds instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
- Be aware that there are special IRS Form 1040 reporting instructions that apply to QCDs.
- Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7 , Q&A 40).
Conclusion
Eligible IRA owners and beneficiaries, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations. Law changes have enhanced other giving options, making professional tax advice essential when making a gifting decision.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2020, Retirement Learning Center, LLC. Used with permission.
