The rules regarding Qualified Charitable Distributions (QCD) keep changing – and it can be hard for your donors to understand this popular giving vehicle.
As you know, a QCD is a direct transfer of funds from an IRA account to a qualified charity. The donor does not get a charitable deduction for the amount given, but they also do not need to count the distribution as taxable income. Importantly, the distribution can be counted toward satisfying a taxpayers required minimum distribution (RMD) for the year.
But two important pieces of legislation have recently changed these rules.
First, in the new fiscal stimulus bill recently signed into law, the required minimum distribution requirements have been suspended for 2020. This does not prevent a donor from making a gift of a QCD to a charity; it means that the QCD will not be used to satisfy the RMD requirements, because there is no RMD requirement for 2020.
Even before the stimulus bill was passed, however, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, approved in 2019, made significant changes to the laws regarding RMDs and QCDs. With the passage of the Secure Act, the minimum age to start taking an RMD was raised from 70 ½ to 72. The new law did not change the minimum age to give a QCD; the QCD minimum age remains at 70 ½. However, since a taxpayer does not have an RMD at that age, they cannot offset any RMD. But the donor can still give up to $100,000 from the IRA to a charity and not have the distribution included in taxable income.
So, let’s say you turn 72 in October of 2022. You could take a QCD at any point in 2022 and offset the RMD that is owed in 2022 from an IRA. To do a QCD, you do not have to wait until you reach age 72 – the only requirement is that the QCD be made in the same calendar year in which you turn 72.
Now comes the trickier part of the Secure Act’s impact on QCDs. The Secure Act also removed the 70½ age limit on contributing to an IRA. As such, those that keep having earned income past age 70½ can continue to contribute to IRAs and deduct their IRA contributions. In 2020, a taxpayer can contribute up to $7,000 a year if they are over 70½ and if they have at least $7,000 of taxable compensation that year.
But for taxpayers who put money into an IRA after age 70 ½, the rules for a QCD get complicated. There is an “anti-abuse” clause which means that any QCD amount will be first reduced by the cumulative amount of post-70½ deductible contributions the taxpayer takes for an IRA that have not already been used to reduce a QCD amount.
OK, so what does this mean? Suppose one of your donors puts $7,000 into an IRA when they are 72, and another $7,000 in the year they turn age 73. In the year they turn 74, they don’t put any more money into their IRA; rather, they want to make a $20,000 QCD contribution to a fund at your community foundation.
Of the $20,000 QCD, $14,000 will be treated as a taxable distribution from their IRA. This is the cumulative amount they deducted from their income after they reached the age of 70 ½. The $14,000 can be deducted as a charitable deduction (if they itemize), but they would also have to include the $14,000 as taxable income. The remaining amount -- $6,000 – would be treated like a normal QCD, in that it cannot be deducted as a charitable deduction, it is not counted as income, and it can be used to offset any RMD requirement.
As you can see, the QCD rules have all of a sudden become more complicated – and that will not be good for the future of this very popular giving vehicle.