How To Make Charity Gifts In A Tax-Smart Way

A new law governing retirement plans, called the SECURE Act (Setting Every Community Up for Retirement Enhancement), went into effect last year. But there are still a lot of questions people have about the shifts. For help, we turned to Bruce Bell, an attorney at the Chicago office of Schoenberg Finkel Beederman Bell Glazer. 

Larry Light: There have been plenty of changes in the law. Let’s tackle one area: Can I still make qualified charitable distributions from my IRA after the recent legislative changes?

Bruce Bell:  Qualified charitable distributions, or QCDs, are still a viable planning opportunity despite recent legislative changes impacting individual retirement accounts. Taxpayers who have attained age 70½ are still permitted to make QCDs, direct transfers of up to $100,000 per year from their IRAs to qualifying charitable organizations. 

Light: What’s taxed and what isn’t?

Bell: While IRA distributions are generally subject to income tax, the amount withdrawn from an IRA as a QCD is not taxable. Absent QCD treatment, an IRA distribution would be subject to income tax while the charitable contribution would primarily only be taken as an itemized deduction.

Light: The age at which you must withdraw money from an IRA is different now, too.

Bell: Yes, the minimum age at which taxpayers must commence distributions from their retirement accounts is higher. But that has not impacted the benefits of QCDs.

Taxpayers with IRAs are required to commence what are called required minimum distributions, or RMDs, at a specified age. Prior to the SECURE Act, the age for commencing RMDs was 70½, the same age at which taxpayers were allowed to make QCDs. The new law increased the distribution age to 72. But QCDs can still be made by taxpayers who reach 70½.

Light: The rules on IRA contributions have changed, too, right?

Bell: Yes, the law also eliminated the age restriction on making IRA contributions. Previously, taxpayers were not eligible to make these contributions after 70½, even if they had earned income from employment or some other source.  There is no longer a limit on the age at which IRA contributions can be made for taxpayers with earned income.

Light: How does all this translate to charity deductions?

Bell: There is a new twist on the favorable tax treatment of QCDs for taxpayers who make deductible IRA contributions after 70½. The amount of a QCD that qualifies for exclusion from income must be reduced by the amount of the deductible IRA contributions made after 70½.

So if a taxpayer turns 70½ and makes a $12,000 QCD and a $5,000 deductible IRA contribution, only $7,000 qualifies for favorable QCD treatment and the $5,000 balance of the charitable distribution from the IRA must be includable in the taxpayer’s income. This is Congress’ way of preventing taxpayers from reaping a windfall by deducting an IRA contribution and then making a QCD, which is not subject to income tax.

Light: Don’t QCDs still have plenty of tax advantages?         

Bell: They do. Considerable benefits remain. QCDs provide meaningful benefits for taxpayers who reside in states that bar itemized deductions. In such states, a taxpayer who withdraws money from an IRA and   cannot itemize deductions for State tax purposes will be subject to State income taxes on the charitable contribution.  This State tax is avoided with a QCD.

With a QCD, the taxpayer need not report the income and therefore is in the same position as someone living in a state that permits itemized deductions and can deduct the charitable contribution.

Light: What else?

Bell: Other tax benefits from QCDs are realized where certain amounts are taxed based on a taxpayer’s adjusted gross income, known as AGI. Social Security benefits, for example, are taxable if a taxpayer’s AGI reaches certain thresholds. With a QCD which is not included in income, a taxpayer’s AGI is not increased—and the taxation of Social Security benefits is not affected as would be if the taxpayer withdrew funds from an IRA and made a charitable contribution.

Any taxpayer maintaining an IRA who makes charitable contributions after reaching 70½ should make the charitable gift as a QCD. Although the SECURE Act made the tax rules more complicated, considerable benefits remain for charitably inclined septuagenarians and older taxpayers with IRAs.