As we’ve discussed this month, COVID-19 and the accompanying shutdowns have significantly impacted charities’ bottom lines. At the same time, the Secure Act, enacted in late 2019 ostensibly to make saving for retirement more attainable, dealt a blow to many persons with large retirement accounts who intended to pass those benefits down to their children as a reliable tax-favored income source.
The Secure Act did away with the rules that allowed most beneficiaries of inherited IRAs to “stretch” out the required distributions over their lifetime. Instead, inherited IRAs must be distributed, and thus income taxes paid by the beneficiary, over a maximum 10-year period. The beneficiary quickly loses the benefit of income accruing tax-free. This is true for all beneficiaries except a spouse, a disabled beneficiary, a minor child, or a beneficiary less than 10 years younger than the original IRA owner. Thus, IRAs, once a tax-favored asset, are now a tax-challenged asset for some.
What’s the solution? Qualified charitable distributions may solve the problem for these individuals and the charities they support.
What is a QCD?
A qualified charitable distribution became a permanent part of the Internal Revenue Code in 2015, allowing some people to transfer a limited amount of funds directly from certain types of IRAs to certain types of charities.
An IRA owner over the age of 70½ can instruct the administrator of the IRA to transfer up to $100,000 in any calendar year to one or more eligible charities. The amount(s) so transferred is not includible in the gross income of the IRA owner-donor; thus, he or she does not owe taxes on the distribution. This is true even though the distribution may be used to satisfy the required minimum distribution the donor would have otherwise had to take (donors age 72 and older).
Who should consider a QCD?
If you are at least 70½ years of age, have IRA funds that you do not need for your support, and are charitably inclined, consider making a QCD.
What’s the benefit of a QCD?
The benefit to the charity is evident — tax-free funds to continue their good work.
The benefit to the donor is that they do not include the distribution in their gross income and thus do not pay taxes where they otherwise would have paid income tax on at least the required minimum distribution amount.
There are other benefits to excluding income from your adjusted gross income on a tax return. For example, AGI determines whether you are subject to the additional 3.8% net investment income tax instituted in 2013. A lower AGI might increase the deductibility of medical expenses. And a lower AGI could free up deductibility of $25,000 of real estate investment losses.
What are the rules for a QCD?
QCDs can only be made from IRAs. SEP and Simple IRAs do not qualify, and of course, there is no reason for a QCD from a Roth IRA (the income would not be included in your gross income anyway), nor do they qualify.
IRA owners can do a QCD of up to $100,000 per year beginning in the year they turn 70½. The distribution must go directly from the IRA to a qualified charity. You cannot take a distribution from the IRA into your name/account and then write a check to the charity — this will count as a taxable distribution to you, followed by a charitable contribution. The transfer must be made from the IRA account directly to the qualified charity.
You cannot receive anything from the charity in exchange for the QCD. The IRS has allowed for de minimis gifts from the charity such as free admission to a museum, free parking at the charity’s location, tote bags, coffee mugs, and other such small “membership giveaways.”
A gift to a religious organization will qualify as a QCD even though the donor attends services at the organization. However, a gift to a university that gives you the right to purchase tickets to an athletic event will not qualify as a QCD. (Sports are so big in some universities there is a specific rule for this since 2017.)
What is a qualified charity?
A qualified charity is a tax-exempt 501(c)(3) organization. The usual church, schools, animal welfare, museums, cultural heritage and sports organizations all qualify.
Donor-advised funds do not qualify, nor do charitable “supporting organizations” (i.e., organizations formed solely to support another tax-exempt organization — such as the fundraising organization that supports a civic league or service club). Certain private foundations can receive QCDs, but this requires individual analysis.
Careful consideration
While a QCD from your unneeded IRA in many cases is a win-win for you and the charities you support, they must be done carefully. There are several issues that can trip up the process. For example, if you contribute to an IRA after you’ve turned 70½, your maximum QCD amount may be reduced accordingly.
Your IRA provider must follow the procedure carefully and deliver the funds directly to your chosen charity(ies). Check with your IRA account holder to be sure they understand the process and can accommodate your plan.
Your IRA account holder will report the QCD as though it was a distribution to you. It will be up to you to report the QCD on your tax return to exclude the income, so be sure your accountant is aware of your plan ahead of time and when they prepare your return.
A QCD is an excellent tool for charitable giving by anyone over the age of 70½. And while you may not need to take a required minimum distribution in 2020 under the Cares Act implemented this year, the charities assure you they need the donations. They’ve still got to keep the staff employed, the programs running and the lights on.
It is said that giving is the greatest act of grace. And couldn’t we all use a little grace these days?
Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild” published October 2020. Reach her via email at Teresa@trlawgroup.net
From https://ift.tt/2H0fTCQ, find us on maps: https://bit.ly/31tHUKW
No comments:
Post a Comment