SECURE Act Changes Squeeze Qualified Charitable Distributions

If you like to give to charity while also trimming your tax bill, the qualified charitable distribution strategy may be your go-to move: IRA owners who are 70½ or older can transfer up to $100,000 per year to charities they support. Plus, the QCD can count toward annual IRA required minimum distributions. And there’s more: The QCD isn’t included in adjusted gross income, so taxpayers who don’t itemize can benefit. Given today’s higher standard deductions that make it harder to itemize, the QCD is an under-the-radar opportunity to trim your tax tab.

But be aware that for some IRA owners, the Setting Every Community Up for Retirement Enhancement Act may throw a wrench into their QCD strategy. That’s because the SECURE Act also created a rule that limits the amount of QCDs a traditional IRA account holder can make, says Jeffrey Levine, director of financial planning for BluePrint Wealth Alliance, in Garden City, N.Y. Referred to as the “anti-abuse provision,” its effect is to reduce allowable future QCDs, he explains. While the intent apparently was to limit any opportunity for abusing charitable QCDs, the result is to make it more complicated to use the strategy.

Why is this an issue? Because one provision of the SECURE Act repeals the age cap for making contributions to a traditional IRA. “IRA owners must now reduce their intended QCDs by any contribution amounts made into their IRAs after age 70½, to the extent they have not already been used to reduce their QCD,” Levine writes in an analysis for Kitces.com, a website geared to financial advisers. “In other words, IRA contributions made after age 70½ cannot be turned around to be used as QCDs.”

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IRA expert Ed Slott says the new rule essentially creates a “taxable QCD,” which traditional IRA owners can take steps to avoid. Because the SECURE Act does away with the age limit for traditional IRA contributions, it opens the door for individuals age 70½ or older to make deductible IRA contributions. But for those who make both QCDs and deductible IRA contributions, the new rule limits the portion of the QCD that is excluded from income. “That effectively creates the taxable QCD,” Slott says. It does not limit the amount of the IRA contribution that is deductible, he notes.

Slott offers this example: You make a QCD in 2020 for $10,000. You also make a $7,000 deductible IRA contribution. Your charity receives the full $10,000, but the tax-free portion of the QCD reported on your tax return is reduced to $3,000. The remaining $7,000 of the QCD is taxable. “It’s the dumbest thing I’ve ever seen enacted,” Slott says.

Keep in mind that the SECURE Act also raises the starting RMD age to 72, effective in 2020. So if you turn 70½ this year, you can do a qualified charitable distribution but it won’t count toward your RMD since those don’t kick in until you are 72. The QCD will still not show up in your adjusted gross income if you aren’t making deductible contributions to the IRA. And the QCD could work to your advantage by lowering the amount of your IRA balance by the time you reach 72 and your RMDs begin, says retired certified public accountant Joseph Namath of Estero, Fla.

A Few Workarounds

There are some moves you can make to avoid the “QCD tax.” The simplest: Just don’t take the deduction for an IRA contribution, Slott says. If you fall below the income thresholds to qualify for Roth contributions, consider contributing to a Roth IRA instead and do a QCD from a traditional IRA.

If you are married, spouses who each have their own IRAs can coordinate contributions to bypass the rule, Slott says. Because IRAs are individually owned accounts, one spouse can choose to use her IRA to make post-70½ deductible contributions and the other spouse can use his IRA to do QCDs.

Traditional IRA contributions can be voluntarily removed until October 15 of the year following the year in which the contribution was made, Levine says. So if you made an IRA contribution, then decide you’d rather do a QCD, you can withdraw the contribution during that time frame so your QCD isn’t reduced.