If you make qualified charitable distributions (QCDs) from your individual retirement accounts (IRAs), you could notice something different when it comes to filing your taxes this year. While the rule I will discuss here was in place last year, it is being addressed in IRS Publication 590-B for the first time.
The "What's New" section of the draft 2021 publication (tinyurl.com/47ntk53j) warns that "Qualified charitable distributions (QCDs) may be reduced. Beginning tax years after December 31, 2019, your maximum annual exclusion for QCD may require an additional adjustment."
The potential reduction affects those who made QCDs AND contributed to their IRAs (deductible contributions to tax-deferred IRAs for 2021 or for 2020).
QCDs: QCDs allow you to make tax-free withdrawals from your IRA to donate to charity, but only if you fall within the narrow confines of QCD rules.
You must be at least 70 1/2 years old (not 72) to make a QCD. The withdrawal must go to a qualified charity, one that is "eligible for tax-deductible charitable contributions." (Use the IRS Tax Exempt Organization Search tool at tinyurl.com/yp4ewwv7). The withdrawal must be a direct transfer from your IRA trustee to the charity. The most you can donate to a charity as a QCD is $100,000 per year.
Taxpayers can use QCDs to offset required minimum distributions (RMDs) for IRAs, which begin at age 72. For example, if an RMD is $30,000, a taxpayer can do a QCD of $30,000 to offset the taxable income on the $30,000 RMD. (That means you will avoid a tax bill on the $30,000, but the money goes to charity, not to you.)
Deductible IRA contributions: If you make deductible contributions to your tax-deferred IRA after age 70 1/2, you will need to adjust the QCD downward.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act (tinyurl.com/3xju8rvs) ended an age limitation (formerly 70 1/2) for contributing to a traditional IRA.
The SECURE Act also provided that taxpayers who make a deductible IRA contribution after turning age 70 1/2 needed to adjust their QCD limit to account for the contribution. Alexander Kotwal, a CPA and tax manager for national accounting and advisory firm Marcum LLP, offers this explanation: "The maximum QCD exclusion is reduced by the excess of deductible IRA contributions in years in which the taxpayer was age 70 1/2 or older, over the total QCDs reported in all tax years preceding the current tax year. For example, if they made a total of $10,000 in deductible IRA contributions for years after 12/31/2019 in which they were 70 1/2 or older and a total of $2,000 in QCDs in prior tax years, their QCD limit would be $92,000 for the applicable tax year."
That calculus is explained in Appendix D of the new 2021 (still in draft form) Publication 590-B. However, let me share a word of caution. The formula seems to contain a typo. If you use the instructions in the draft of Appendix D, then subtracting $-8,000 from $100,000 would result in $108,000. The correct result, as mentioned above, is $92,000.
An IRS spokesperson confirmed that the QCD worksheet will be corrected for Appendix D when the final version of Publication 590-B is released for the 2021 tax year.
Be sure to consult your tax adviser if you have made QCDs and deductible IRA contributions in the past, or if you are thinking of doing either in the future, as there is now an additional factor for your decision-making.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org). Please visit www.juliejason.com.
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