Qualified Charitable Distributions in 2020 (Article)


Qualified Charitable Distributions in 2020

Keeping with our recent themes of giving and required minimum distributions (RMD), this week’s money message is about Qualified Charitable Distributions (QCD) and the changes that came with the SECURE Act and the CARES Act.

First, what is a QCD? The QCD is a way for individuals age 70.5 and older to direct distributions of up to $100,000 from IRA accounts directly to the qualified charity of their choice without increasing their Adjusted Gross Income. Usually this is used to accomplish planned giving or to re-direct unneeded RMD’s to charitable causes without a tax liability.

Typically, a form is filled out and sent to the IRA custodian directing the payments. The IRA custodian will send the money to the charity and send you a tax form for the distribution. The charity will send you another tax form for the donation. Unlike other charitable giving, this is an “above the line” deduction. Above the line deductions are dollar for dollar reductions in adjusted gross income that come before itemization or the standard deduction. With this arrangement the charity gets a higher contribution because they get to keep the part that would have been taxed. You took a tax deduction putting the money in the IRA, got tax deferred growth and were able to distribute it tax free. It’s a great deal for people who give regularly to charity.

The SECURE act in December 2019 did make a few changes. First it stopped the prohibition of contributing to traditional IRAs past age 70.5. This created a tax loophole with QCDs so to fix it they added the “taxable” QCD. What this means is that if you contribute to an IRA you will have to pay tax on the QCD up to the amount contributed. Example: you contribute $5000 to an IRA and make a $10,000 QCD. You will be taxed on $5,000 of the QCD and the other $5,000 will be tax free.

What about 2020? The CARES Act waived all RMD rules for 2020. Since QCDs are often associated with RMDs some may think they can’t do it this year. You can. The CARES Act does not prohibit QCDs for 2020.

In conclusion, if you qualify, QCDs are a superior way to fund your charitable goals. Recent legislation has added a few wrinkles to the process but for most, little has changed. For more information go to https://www.irs.gov/publications/p590b#en_US_2019_publink100041439

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