Charitable contribution limit for cash contributions to charity increased from 50% to 60% of AGI. Unfortunately, the charitable deduction is a “below-the-line” deduction, a taxpayer must itemize in order to get the deduction. The reality is fewer taxpayers will be eligible to itemize today.
The following example illustrates how to use qualified charity distribution (QCD) to ensure a tax benefit.
- Adam is single and 72
- Lives in a low-tax state and has no mortgage
- Only significant itemized deduction in 2020 would be $10,000 charitable contribution
- No tax benefit because Adam is better off using the standard deduction of $12,400, plus $1,650 for being over age 65
A few caveats:
- QCD must be made from pre-tax IRAs only
- Must occur after IRA owner turns 70½
- IRA owner must receive timely written acknowledgment of receipt of IRA distribution from charity
- Will be reported as a taxable event on 1099-R
- Burden on taxpayer and tax preparer to report distribution as non-taxable
What happened after the SECURE Act?
- Age for eligibility to take QCDs remains at 70½
- Deductible IRA contributions after 70½ reduce QCDs
- Example: Under new law, Jason makes deductible contribution of $7,000 to his traditional IRA in 2020 when he is 70½. He makes another deductible contribution of $7,000 in 2021. When Jason turns 72 in 2022, he decides to make QCD of $20,000. Amount of QCD that will be tax-free is reduced by previous post-70½ deductible contributions. Result: Only $6,000 of QCD will be excluded from his 2022 income.