We have reviewed the changes that the SECURE Act has made to every community to improve their pensions. We are covered RMDs (just the regular type), Student loans, and posts, Now we’re talking about QCD – Qualified Charitable Distributions. We will also cover the new anti-abuse rule.
The original rules for QCD are: If you are over 70½ years old (subject to RMDs according to the pre-SECURE rules), you can distribute directly from your IRA or other qualified plan to a non-profit organization. If you qualify this direct distribution as a QCD, you do not need to include the amount of the distribution as income in your tax return. (For more information on tax treatment and why this is a big deal, see This article about QCDs.)
According to the SECURE Act, QCD now has some differences.
Although SECURE has changed the RMD age to 72, you can only make QCD distributions when you reach 70½. This is a slight deviation from the old rule, which states that you must be subject to RMD before you can create a QCD. Now you can create a QCD at any age after 70½ years, even if you may not be subject to an RMD until you are 72.
However, the other difference is more important: Since SECURE has also made a change to that Post rulesIf you allow contributions to be made at any age (previously not allowed after 70½ years), there is an anomaly that is dealt with in the rules. This new rule is called the QCD anti-abuse rule and exactly matches your ideas.
If there is no anti-abuse rule, you can contribute to your IRA (if you have revenue) and then immediately withdraw it as a QCD. This would result in you setting double tax preferences for that particular money.
Suppose you are single, 71, and have a total income (before doing business with your IRA) of $ 50,000. You regularly pay a deductible of $ 7,000 for your IRA and reduce your adjusted gross income to $ 43,000. Then instruct the IRA Custodian to distribute $ 7,000 as a QCD to your preferred charity. Since QCD distributions are not included as income, your adjusted gross income remains at $ 43,000.
But you made a deductible there and A QCD gives you double the tax benefit from this activity. Enter the QCD anti-abuse rule.
With the QCD anti-abuse rule, when performing a QCD distribution, you must include in your income all contributions to your IRA or other plan deducted after the age of 70. As soon as the amount of your contributions deducted after the age of 70 has been reached tries QCDs: You are entitled to surplus amounts being treated as QCDs and not included in taxable income.
Back to our example: Suppose you make the deductible contribution to your IRA at 71, and you made a similar deductible contribution to your IRA last year when you reached 70½. So you made a total of $ 14,000 deductible contributions to the IRA.
Now you decide to create a QCD for your favorite $ 20,000 charity. You may only handle your tax return with $ 6,000 of the QCD distribution, since you had $ 14,000 in deducted IRA contributions after you turned 70. Your income for this year was originally reduced by $ 7,000 for the deductible IRA contribution, but has now been increased by $ 14,000 because your QCD portion is no longer eligible. The remaining $ 6,000 is still eligible as a QCD.
You can still list this $ 14,000 contribution to charity. Since (for 2020) the standard deduction for someone in your position (single and over 65 years old) is $ 13,700, you get the full benefit of this single deduction along with your other single deductions.
In order for this to work properly, if you made deductible contributions after the age of 70, you still have to try to create the QCD as if you had not made any deductible contributions after the age of 70. So ask your custodian to send the money directly to the qualified charity. This also applies to QCDs. Otherwise, if you bypass the QCD process and make a distribution on your behalf, you won’t be able to cross that amount off your previously deducted amounts, followed by a contribution to the charity.
According to our previous example, if you made $ 14,000 in deductible contributions to your IRA after age 70 and later wanted to donate $ 5,000 from your charity, you might think that following this QCD process is pointless because that amount regular distribution (and therefore taxable) is considered an amount anyway. If you follow the QCD rules and not, attempt If you want to make a QCD out of this $ 5,000 distribution, you still have $ 14,000 in deductions that will continue to work against your future potential QCDs. However, if you run this $ 5,000 payout through the QCD process, you will reduce your future anti-abuse deductible to $ 9,000. If you continue the QCD process in the coming years, you may be able to break the deductible balance and be able to create a successful QCD.
Remember that contributions after the age of 70 follow you for the rest of your life, or at least until you’ve earned enough tries QCD distributions to consume your past deducted contributions. Assuming you waited until you were 80 to create a QCD – you need to add up all of your deducted IRA contributions from 70½ up to this year and deduct these deducted contributions before the QCD is granted the special tax treatment.
It could work better in the long run if you made these IRA contributions than not deductible, depending on your circumstances. You may want to review the numbers and you may want to contact your accountant to decide which direction makes the most sense to you.
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