January 12, 2020

SECURE Act of 2019 and QCDs

If you’re over 70 1/2 and charitable and plan to contribute to your IRA,

you must read this first

  • QCD anti-abuse language in the new law, while fair, places extra record-keeping burden on donor-taxpayers
  • Beware of the tax trap that IRS has set for the uninformed and ill-advised
  • New law can be a win-win for diligent donor-taxpayers who heed our advice

As an unabashed proponent of the Qualified Charitable Distribution (QCD) tax strategy and author of QCDNow.com, upon learning that the new SECURE (Setting Every Community Up for Retirement Enhancement) Act extended the age for which working Americans can contribute to their IRAs, my first thought was how IRS was going to prevent financially-savvy retirees from double-dipping on the tax savings using QCDs. While tax and financial advisers to date have briefly mentioned the “anti-abuse rule” for Qualified Charitable Distributions etched into the new law, none have yet to explain the logic behind the rule and offer up a scenario or two for applying the rule to a typical (read: realistic) retiree’s tax situation. Until now.

As tax preparers our best source for guidance on a new law often starts with IRS tax forms and instructions. Unfortunately IRS Form 8606, which is the form I expect IRS will want preparers and taxpayers to use to document the new-rule IRAs and QCDs, will not be available in draft form until September 2020, since it is a 2020 law that won’t be reported until tax filing season 2021. Meanwhile, the uninformed will be planning and transacting their IRAs and QCDs without fully understanding the new law’s potential pitfalls.

If you don’t know what a Qualified Charitable Distribution (QCD) is, please visit qcdnow.com to learn more about the strategy and why my company, 1040Plus, is so excited about it. Then, if the QCD tax strategy sounds right for you, return to this article to learn how you can remain eligible for enjoying the tax benefits of QCDs for the rest of your life.

So without further ado, let’s get to work by first breaking down the language of the new tax law as it relates to IRAs and QCDs. The fun begins in Section 107 of H.R. 1865. Because the new law references existing (pre-Act) law, I’ll post the existing law in blue and its SECURE Act 2019 update in green:

U.S. Code § 219. Retirement savings
(d) Other limitations and restrictions
(1) Beneficiary must be under age 70½
No deduction shall be allowed under this section with respect to any qualified retirement contribution for the benefit of an individual if such individual has attained age 70½ before the close of such individual’s taxable year for which the contribution was made.

(a) IN GENERAL.—Paragraph (1) of section 219(d) of the Internal Revenue Code of 1986 is repealed.

U.S. Code § 408. Individual retirement accounts
(d) Tax treatment of distributions
(8) Distributions for charitable purposes
(A) In general
So much of the aggregate amount of qualified charitable distributions with respect to a taxpayer made during any taxable year which does not exceed $100,000 shall not be includible in gross income of such taxpayer for such taxable year.

Add at the end of section 408(d)(8)(A) of such Code the following: ‘‘The amount of distributions not includible in gross income by reason of the preceding sentence for a taxable year (determined without regard to this sentence) shall be reduced (but not below zero) by an amount equal to the excess of—
‘‘(i) the aggregate amount of deductions allowed to the taxpayer under section 219 for all taxable years ending on or after the date the taxpayer attains age 701⁄2, over
‘‘(ii) the aggregate amount of reductions under this sentence for all taxable years preceding the current taxable year.’’.

Got that? Didn’t think so. So please allow me to translate the language into layman’s terms:

The QCD amount the taxpayer may exclude from gross income for a taxable year shall be reduced (but not below zero) by the excess of…
a) the sum of the taxpayer’s post 70 1/2 IRA deductions, minus
b) the sum of all prior-year QCD reductions

It is important that the reader understands that QCD reductions in b) must not be confused with gross income reductions, which is what results from an allowed QCD; rather, a QCD reduction is the disallowed portion of the QCD. To simplify the above even further, while appeasing the numbers geeks who are reading this, let’s put it into an equation:

allowed_qcd = max(desired_qcd – max(post70_ira_deductions – past_disallowed_qcds), 0), 0)

Even better, let’s illustrate the above formula in a spreadsheet with a real life example: SECURE Act QCD Scenario

[Plug: Like the spreadsheet in the above pdf? A web-based interactive version is included free with our QCD Navigator and QCD Pro memberships]

Not until one reads the scenarios can one begin to appreciate the record-keeping burden IRS has placed upon retirees and their tax preparers as a result of the new law as it pertains to new-rule IRAs and QCDs. Fortunately, the extra burden will only apply to those QCD-eligible taxpayers who are still working and wish to contribute to their IRAs while maintaining their QCD strategy, likely a minority. For these taxpayers, having the opportunity to “replenish” one’s RMDs with tax-deductible dollars is quite compelling, even more so if a portion of those RMDs can be excluded from income downstream with a dedicated QCD regimen beginning at age 72.

Still, the temptation for retirees to reduce their AGI with “instant gratification” IRA deductions that, on average, exceed typical charitable contributions, combined with the QCD reduction rule, will not only likely result in IRAs’ emergence as the preferred tax savings strategy for those eligible, but may also sway these taxpayers to abandon the QCD strategy altogether.

Joel T. Dimengo, RTRP, AFSP
President, 800-TAX REFUND, Inc. DBA 1040Plus

© 2020 1040Plus. All rights reserved.

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