New Twist Added To The IRA To Charity Provision

Explaining the new twist of the IRA to Charity provision is a bit challenging. Ever since 2006, individuals age 70½ or older have been able to transfer up to $100,000 annually from an IRA to a charity (as long as the charity qualifies). These transfers are referred to as qualified charitable distributions (QCDs). Here is how this provision, when used, plays out on a tax return:

The IRA distribution is excluded from income;
The distribution counts toward the taxpayer’s required minimum distribution (RMD) for the year; and
The distribution does NOT count as a charitable contribution.

Hidden Tax Benefits

At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer with itemized deductions lowers his or her adjusted gross income (AGI). This helps with other tax breaks. Some of those tax breaks are pegged at AGI levels. Examples of those tax breaks include for medical expenses, passive losses, and taxable Social Security income. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.

The age 70½ threshold for QCDs was originally coordinated with the age 70½ requirement to begin taking distributions. These distributions come from qualified employer plans and traditional IRAs known as RMDs.

The SECURE Act and QCDs

However, the SECURE Act (Appropriations Act of 2020), effective beginning in 2020, increased the RMD age to 72. It also still allows QCDs once the taxpayer reaches age 70½. The act also repealed the age restriction for making traditional IRA contributions. This means a taxpayer can make traditional IRA contributions and QCDs after reaching age 70½. As a result, Congress included a provision in the act. This provision requires a qualified taxpayer to make a QCD to reduce the QCD non-taxable portion by any traditional IRA contribution that is deducted and made after reaching 70½. Even the contribution and QCD are not in the same year.

Examples of how the IRA to Charity twist works

Example #1

Jack makes a traditional IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72. He claims an IRA deduction of $7,000 on his tax return for each year. Then later when he is 74 he makes a QCD in the amount $10,000 to his church’s building fund. Since Jack had made the IRA contributions after age 70½, his QCD must be reduced. However it can not be reduced below zero, by the post-70½ contributions that were deducted. As a result the $10,000 is taxable. However, he can claim $10,000 to the church building fund as a charitable contribution on Schedule A. But only if he itemizes his deductions.

Example #2

Bob makes a traditional IRA contribution of $7,000 when he is age 71. He makes another $7,000 contribution at the age of 72. He deducts the IRA contributions on his returns. Then later when he is 74, he makes a QCD in the amount $20,000 to his church’s building fund. Since Bob made the deductible IRA contributions after age 70½, for tax reporting his QCD must be reduced by the $14,000. As a result, of the $20,000 QCD, $14,000 is a taxable distribution and $6,000 is nontaxable. And Bob can claim a $14,000 charitable contribution.

If you think that this tax provision may affect you and you have questions, please call this office.

If you missed any of the earlier tax law change articles you can view those articles at the links below: