CASE OF THE WEEK – 2021 Qualified Charitable Distributions from IRAs
2021 Qualified Charitable Distributions from IRAs
A recent call with a financial advisor from Alabama is representative of a common inquiry related to charitable giving. The advisor asked: "The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the age for taking requirement minimum distributions (RMDs) to age 72. Did it also change the age for making Qualified Charitable Distributions (QCDs)?"
No, the SECURE Act did not change the eligibility age for making a QCD; it remains at 70½. So, any "eligible IRA owner or beneficiary" (defined below) can make a QCD up to $100,000 for 2021 by December 31, 2021. The contributor must keep records to prove the amount of the QCD to qualify (see Substantiation Requirements in IRS Publication 526, Charitable Contributions).
Those who make QCDs before reaching age 72 will not have the added benefit of counting them towards their RMDs, but the QCDs still will be excludable from taxable income and go towards supporting good causes. Because a 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[1] in the same year may need to limit the portion of a QCD that is excluded from income.
An eligible IRA owner or beneficiary for QCD purposes is a person who has attained 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 §170(b)(1)(A) of the Internal Revenue Code (IRC) (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 QCD contributor would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD.
Where an individual has made nondeductible contributions to his or her traditional IRAs, 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 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).
There are other charitable giving options aside from QCDs. For example, the Consolidated Appropriations Act extended two temporary tax changes through the end of 2021 to encourage charitable giving by individuals (see Covid Tax Tip 2021-143). They include 1) a limited deduction (up to $600 for married couples) for cash contributions for individuals who do not itemize deductions; and 2) a deduction of up to 100 percent of the taxpayer's adjusted gross income for certain charitable cash contributions (if properly elected on their 2021 Form 1040 or Form 1040-SR) by those who itemize their deductions.
As one can see, the options for charitable giving are many and can be confusing, making consultation with a tax professional a recommended course of action.
Eligible traditional and Roth 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 and extensions have enhanced other giving options, making professional tax advice essential when making a gifting decision.
1 The SECURE Act also eliminated the maximum age limit for making traditional IRA contributions.