CARES Act and 2020 Planning: Qualified Charitable Distributions Under the New Law
The CARES Act creates unique considerations for those who are charitably inclined and not required to take an RMD in 2020.
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) waives required minimum distributions (RMDs) from IRAs and retirement plans for the 2020 tax year. As a result, some clients are wondering if they should use IRA assets via qualified charitable distributions (QCDs) to satisfy their charitable intentions this year.
Important terms defined:
Required Minimum Distributions - RMDs are amounts the federal government requires you to withdraw annually from certain retirement savings vehicles after you reach age 72, which was increased from 70½ as part of the 2019 SECURE Act. Includes traditional IRAs, SEP-IRAs and SIMPLE IRAs.
Qualified charitable distributions (QCDs) - These enable you to make tax-advantaged donations from your IRA during your lifetime. An individual who is 70½ or older can take a non-taxable distribution of up to $100,000 from their IRA if that distribution is made directly to a charity. The distribution can satisfy or help satisfy the RMD from your IRA.
How QCDs work
Since any potential income taxes owed on these distributions are eliminated as long as funds go directly to a charity, QCDs are not included in adjusted gross income (AGI). QCDs have been attractive for individuals who don’t need or want the funds from their RMDs and would incur increased tax liabilities if distributions were taken as income.
While QCDs are still available in 2020, you may find other methods for donations are preferred based upon your specific situation.
When gifting vehicles other than QCDs may be optimal:
- If you are an itemizing tax filer (total itemized deductions of greater than $12,400 for individuals and $24,800 for married filing jointly), the CARES Act allows you to claim an itemized charitable deduction of up to 100% of AGI for cash contributions made in 2020. Typically, individuals are capped at 60% of AGI for cash contributions. This is a one-time unlimited cap on cash donations for 2020.
- A donation of appreciated stock may be advantageous for tax purposes in 2020 if you itemize. The charitable deduction can be captured while permanently eliminating unrealized capital gains and diversifying a portfolio that may be concentrated.
- Depending on your charitable intent, you may consider a smaller contribution in 2020 and use QCDs in early 2021. This would allow you to offset up to $100,000 of your 2021 RMDs.
- Using a method such as cash rather than a QCD for 2020 gifting allows your IRA assets to recover from market declines.
When using QCDs in 2020 may be optimal:
- You may decide to use IRA assets for a QCD if other assets are limited.
- Making a QCD can lower future RMDs by reducing your IRA balances.
- A QCD may provide multigenerational tax benefits if you are in a lower tax bracket than your IRA beneficiary.
- You may wish to reduce your taxable IRA balances for a non-spouse designated beneficiary in light of the SECURE Act, which mandates that funds be distributed over 10 years following the death of an IRA account owner.
Review your gifting alternatives
The CARES Act creates some unique considerations for people taking RMDs and making charitable contributions in 2020. In general, individuals who already planned to do charitable giving and who file their taxes using the standard deduction should think about gifting via QCDs. Itemizing filers should weigh other options for their 2020 charitable gifting such as using cash and/or appreciated stock.
As always, you should review any plans for charitable donations and withdrawals from your IRA with your tax advisor.
For more information, please contact your Key Private Bank Advisor.