Charitable Giving: The Quasi-Rollover

Take-Away: Last December Congress extended the unlimited charitable contribution for cash gifts to most public charities through the end of 2021.

Background: The Covid Relief Act (Act) passed on December 27, 2020 extended the unlimited charitable contribution for cash gifts to most public charities through the end of 2021. [Section 2205 of the Act.]

Opportunity: The Act creates a once-in-a- lifetime opportunity to move substantial amounts from retirement plans to charities beyond the qualified charitable distribution (QCD) opportunity. [IRC 408(d)(8).]

– IRC 170: Prior to 2020, the Tax Code limited cash gifts to charities to 60% of the donor’s adjusted gross income (AGI) for the year. The Act eliminates the IRC 170 percentage  limitation on cash gifts to most charities.

–DAF’s Excepted: The suspension of the percentage limitation for cash gifts to public charities does not apply to either supporting organizations or to donor advised funds (DAF.)

– Excess Contributions: If a cash gift to a charity in the year exceeds the donor’s adjusted gross income for the year, then the excess amount of the cash gift can be carried over to future years, but then the carried over charitable gift amount will be subject to the percentage limitation in those carryover tax years.

Avoids the QCD Limitations:  The ability to give cash to a charity of an unlimited amount will be of interest to those donors who want to give more than the limited amount using a QCD. Recall that with a QCD:

– the source of the charitable gift must be a traditional IRA;

– the donor must be at least age 70 1/2;

– the amount distributed from the donor’s IRA is limited to an aggregate of $100,000 for the year; and

– the charitable gift must come directly from the IRA custodian.

With this 2021 giving opportunity, the source can be the donor’s 401(k) account (if the plan permits a penalty-free distribution at that age.) An unlimited amount of cash can be given to charities without any dollar limitation. The donor need not be age 70 1/2, but should be at least age 59 1/2 to avoid the early distribution 10% penalty. The donor sends the checks to the charities, not the IRA custodian.

Planning Steps: The steps are pretty simple to implement a quasi-rollover. The donor directs the retirement plan custodian to convert some of the investments in the IRA (or their 401(k) account) to cash. The donor then takes a taxable distribution from their IRA (or their 401(k) account.) That distribution is included in the donor’s taxable income for 2021. The donor then make the cash gift to his or her favorite charities. The unlimited charitable income tax deduction associated with the cash gift to charities completely offsets the taxable income associated with the retirement plan distribution to the donor.

Conclusion: Over the years, with the very large applicable exemption amounts where a charitable estate tax deduction will not save estate taxes, individuals have been encouraged to convert the charitable bequests in their Will and Trust to lifetime gifts to take advantage of the charitable income tax deduction. In addition, the SECURE Act’s 10-year distribution requirement for inherited retirement plans  makes holding substantial amounts in retirement accounts at death a more expensive asset to inherit. Other pending bills in Congress would make estate taxes even more expensive. For some philanthropically inclined individuals with large IRA or 401(k) balances, they may find a very large cash gift to charities this year, e.g. to payoff a charitable pledge, to be a financially sound move.