By Sarah Brenner, JD
As the coronavirus pandemic has raged on, we have seen devasting images of overwhelmed hospitals and long lines of cars at food banks. If you are fortunate enough to have money to spare, you might be thinking about how you can help. One option to consider is a qualified charitable distribution (QCD).
QCDs Still Available for 2020
In response to the pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress. Included in this giant relief package was a provision that waives required minimum distributions (RMDs) for 2020 from retirement accounts.
You may be wondering if you can still do a QCD for 2020 even though your RMD is waived. The answer is yes. QCDs can still be made even in years when no RMD is required. QCDs from IRAs are still available in 2020 and still offer tax benefits, even though RMDs are not required.
How a QCD Works
QCDs allow IRA owners who are age 70 ½ or older to directly transfer up to $100,000 annually from an IRA to charity, tax-free. If you are married, you and your spouse may both transfer $100,000 for a total of $200,000. QCDs are also available to IRA beneficiaries over age 70 ½, but are not available from company plans or active SEP or SIMPLE IRAs. QCDs are limited to pretax IRA funds. One key component of a QCD is that the funds must be paid directly from the IRA to the charity. You may not take a distribution from your IRA and then contribute it to a charity and consider that transaction a QCD. Also, you may not receive anything of value from the charity in exchange for making the QCD.
QCD Tax Benefits
After tax reform arrived in 2018, QCDs became more valuable than ever. Many taxpayers now take the standard deduction, eliminating the tax deduction for charitable gifts. QCDs add to the standard deduction by allowing the donations made from the IRA to be excluded from income. With a QCD, you get a tax break for your charitable contribution even if you are using the standard deduction.
Another benefit of a QCD is that the amount transferred from the IRA to the charity is not included in your adjusted gross income (AGI) for the year. By not including the distribution in AGI you can potentially avoid the loss of exemptions, deductions, credits and phase outs, AMT (alternative minimum tax), the 3.8% surtax on net investment income, and the increase in Social Security premiums for Medicare Part B and Part D.
While RMDs are waived for 2020, QCDs remain as a viable tax strategy and could be more valuable than ever to charities during these trying times.