10-Aug-20
Alternative to Qualified Charitable Distribution
Take-Away: A qualified charitable distribution (QCD) is an excellent way to carry out philanthropic objectives. However, there are several restrictions on the use of a QCD. In 2020, with one of the provisions of the CARES Act, a couple of the impediments to the QCD can be avoided if a donor wishes to make a large cash gift to charity when their philanthropy will be most impactful.
Background: We have covered QCD’s in the past. We know that a QCD will satisfy the donor’s required minimum distribution (RMD) obligation for the year, but there are no RMDs for 2020. We know that a QCD must be made from an IRA, not a 401(k) account. We know that the donor must be at least age 70 ½ when the QCD is made. And we know that neither donor advised funds (DAF) nor private foundations are eligible to receive QCDs. So for those individuals who want to make large gifts to their favorite charity that is financially struggling after the pandemic, a charity that has had to cut-back on staff or programs when they are most desperately needed, but who do not meet the eligibility for a QCD, are they out of luck? Maybe not.
CARES Act: Normally cash gifts by a donor to charity are limited to 60% of the donor’s adjusted gross income for the year. Excess charitable deduction amounts are then ‘carried over’ for the following 5 years. The CARES Act changed this limitation, but only for 2020. Rather than being subject to a 60% of adjusted gross income (AGI) limit, gifts of cash to charities described in IRC 170(b)(1)(A) are deductible in amounts up to 100% of AGI, but only if the gift is completed in 2020. Gifts of appreciated property to charities continue to be capped at 30% of the donor’s adjusted gross income.
Example: A donor who is under the age of 70 ½ but over 59 ½ who has a sizeable amount of assets in her IRA could take a large IRA distribution (more than $100,000 if she was so inclined) as taxable income in 2020. She could then give that amount of cash to a charity that is in desperate need of financial support. While the donor would report the entire amount withdrawn from her IRA in her taxable income for 2020, she is also able to now deduct up to 100% of her adjusted gross income in 2020 (including the IRA distribution amount) as a charitable deduction. The income tax charitable deduction offsets the taxable income from the IRA distribution, which is the equivalent of a tax-free charitable rollover.
QCD Alternative: The effect of this strategy is to bypass the $100,000 limitation if a QCD had been used, and effectively reduce the donor’s effective age limit for a QCD from 70 ½ to 59 ½.
Conclusion: This charitable strategy will only be viable for a donor who considers his or her IRA as an excess financial resource held in a tax-favored retirement account. Yet for those donors who want to help non-profits when they need financial support the most, like in 2020, withdrawing funds from an IRA and giving the cash to charity is something to consider, but this option is only available for 2020.