Do you have charitable giving dreams or commitments you want to fulfill this year but don’t want to deplete your cash? The CARES Act presents some new opportunities available in 2020 only. And don’t forget the tried-and-true strategies still available to you.
Let’s face it, IRAs can be confusing, so let’s look at some options according to the age of the IRA owner. That should help you understand what might work best this year to maintain or even increase your giving to the charities you love.
Note that these opportunities may not be for everyone. Consult with your tax and financial advisors to understand the consequences of any giving solution to your unique situation, and be sure that you have more than needed for your current and future financial needs. If giving from an IRA is not a good fit for you, consider the various other options for giving available this year.
First, we’ll define a few terms:
- Adjusted gross income (AGI) – A lot of numbers go into figuring AGI, but big picture, think of it as your income before you take your standard or itemized deduction (including the charitable deduction) and qualified business income deduction. You can find yours on the first page of your IRS Form 1040; it’s in bold letters towards the bottom.
- Regular distribution – simply a withdrawal from an IRA after the owner turns 59½. A regular distribution is generally made to you, and it is reported as income on your tax return.
- Qualified charitable distribution (QCD) – a distribution from an IRA which is paid directly to the qualified charity after the IRA owner turns 70½. An IRA owner can make QCDs of up to $100,000 annually. If your distribution counts as a QCD, the amount is not reported as taxable income on your tax return. Amounts that exceed $100,000 or don’t fit the QCD rules are typically treated as regular distributions. QCDs are also sometimes referred to as an IRA charitable rollover.
- Required minimum distribution (RMD) – An IRA owner who turned 70½ before January 1, 2020, or turns 72 after that date, is required to distribute a certain portion of his or her IRA every year. This is known as your RMD. You can satisfy this requirement by making regular distributions, QCDs, or both from your IRA.
Note that the CARES Act waived the RMD for 2020 so that IRA owners are not required to make distributions this year, but givers can still choose to make regular distributions and QCDs.
Options by age:
Think of your IRA on an age-based timeline. If you distribute assets before the age of 59½, you are making an early withdrawal and will likely pay both the income tax and a 10 percent penalty. As you move through the ages, regular distributions and QCDs become available to you, and eventually RMDs become a requirement. For those who have not yet turned 59½, there are likely better options to explore for your giving.
Age 59½ or older
At this age, you may make a regular distribution from an IRA without an early withdrawal penalty. You will still be required to take this as income, but you may offset some or all of the federal income tax by making a deductible gift to charity in the same year. This isn’t new; this option is available every year.
What’s new is that the CARES Act created a unique opportunity available in 2020. If you make a regular distribution of any amount from your IRA and give it to charity, you can claim a charitable deduction on your federal income tax return for the full amount up to 100 percent of your AGI. This is not a QCD; you still have to take the distribution as income, but you then claim a charitable deduction that offsets the federal income tax.*
For example, if you take $150,000 out of your IRA this year and give it all to charity, you may deduct up to this entire amount from your federal income taxes. If you have other deductions that lower your income so that you can’t fully deduct the charitable gift this year, you can carry the unused charitable deduction forward for five years under the normal rules for charitable deductions.
*Note that the income may have other tax ramifications for you. For instance, you may still owe state income taxes if your state does not allow a charitable deduction. Consult with your tax and financial advisors.
Age 70½ or older
If you are 70½ or older, you might consider making a QCD from your IRA directly to charity, rather than using a regular distribution (to yourself) followed by a charitable gift. A QCD lets you give to charity without having to include the distribution in your AGI. This means there are fewer ramifications for other taxes, and you don’t have to itemize your deductions in order to get the tax benefit of the gift. Depending on your goals, you can even make both a QCD and a regular distribution followed by a deductible gift in the same year.
While there is nothing new about making a QCD (also called an IRA charitable rollover), keep in mind that it may be an excellent choice for the first $100,000 of your charitable giving.
Age 72 or older
At age 72, every IRA owner must begin taking an RMD if they haven’t started already. These can be regular distributions, QCDs, or both. For example, if your RMD is $50,000, you can satisfy this by making a QCD of $30,000 directly to a charity and taking a regular distribution to yourself of $20,000. If you then use the $20,000 for a deductible gift to your donor advised fund (Giving Fund at NCF), you would use your IRA to fund the charities you care about in a tax-efficient manner while fully satisfying your RMD.
Just remember, you don’t have to wait until you are 72 to make distributions from your IRA. You can make regular distributions starting at 59½ (and use a charitable gift to offset some or all of the income) and you can make QCDs starting at 70½.
However you choose to give this year, NCF wants to help you fulfill your goals and commitments. Feel free to reach out to your local NCF team. We would happy to work with you and your financial advisor to find the right solution for your giving.