Give IRA Funds Directly to Charity

If you are over age 70 ½ and receive annual required minimum distributions (RMDs) from your IRA (s), you may have more flexibility this year than you think.

Transfer funds directly from an IRA to a charity. There are no federal income tax consequences to this “qualified charitable distribution” (QCD).

A 2020 QCD may still make sense in your situation, even though the RMD rules are suspended for this year.

Under current law, a taxpayer who is age 70 ½ and older can transfer IRA funds directly to a qualified charitable organization, up to an annual limit of $100,00 ($200,000 for a married couple, if both spouses own IRA’s in their own names). Although no federal income tax deduction is allowed for QCD’s donors are not taxed on the transfer either. In other words, it’s a “wash” for tax purposes.

Usually, taxpayers who are older than age 72 (70 ½ prior to 2020) must begin taking RMDs from their IRAs each year. Failure to do so results in a 50% tax penalty on any shortfall, on top of the regular income tax hit. Fortunately, a QDC counts as an RMD.

But the Coronavirus Aid, Relief and Economic (CARES) Act suspended RMDs for the 2020 tax year. So, you don’t have to take any RMDs this year.

Practical Idea: Despite the CARES Act respite, you might complete a QCD anyway. The distribution isn’t taxable and enables you to satisfy charitable intentions.

Furthermore, a QDC isn’t included in your adjusted gross income (AGI) for 2020. As a result, you may avoid the loss of deductions and credits, the alternative minimum tax (AMT) and 3.8% tax on net investment income (NII).

Small Business Tax Strategies
September 2020