Reconsidering the Source of Your Charitable Contributions in 2020

Summary Points in this article

• IRA Required Minimum Distributions are optional in 2020
• Those planning QCD Gifts to Charity from IRAs may wish to reconsider in 2020
• Consult with your tax preparer regarding your IRA RMD, your charitable gifts and your plan for making quarterly estimated taxes in 2020

“But I was just getting the hang of this QCD thing….”

In the midst of these difficult and unusual times, I have been most impressed by the creativity of those around me. Humans have an amazing ability to adapt. In a matter of weeks we have changed the way we work, the way we interact, the way we educate our children, the way we exercise, the way we grocery shop, the way we rest, and the way we entertain. We are picking up old hobbies again. We’ve heard wonderful stories of clients spending more time in their gardens, creating art, playing music on their front porches, and spending more time with their families, even if virtually. Neighbors are helping each other—offering to buy groceries for those at risk, making masks, donating food, and volunteering to deliver meals to those in need.

The federal government recently passed the CARES Act in an effort to relieve Americans of financial burden during these unprecedented times. With the CARES Act comes yet another way for us to learn and adapt. If you are over the age of 70 ½ with an IRA, we recommend reading the remainder of this article. Of course, we hope our clients of all ages will learn something if they’d like to keep reading!

So, here we are, adapting again: Just when we thought we were getting the hang of the changes from The Tax Cut and Jobs Act (TCJA), we are mixing things up. Passed in December of 2017, the TCJA doubled the standard deduction. This change meant that most of us were not itemizing deductions on our income tax returns anymore. Without itemization, our charitable gifts were no longer reducing our tax bill. Granted, they were still giving us the joy of helping our community, but for those over 70 ½ there was a way to enjoy the “gift of giving” while lowering income taxes. This was via a Qualified Charitable Distribution (QCD), which is a gift taken from your IRA and given directly to charity. You might remember Mary Lou Daly’s article Over Age 70 1/2? Consider a QCD for your IRA RMD.

Throughout 2018, 2019, and up until the CARES Act passed on March 27, 2020, if you are over 70 ½ you might have heard us say, “You can’t go wrong with a QCD. It always reduces your taxable income, as long as you don’t take out more than your RMD amount from your IRA.” Well, as Marc Scavo referenced in his article The CARES Act and 2020 Required Minimum Distributions, RMDs are waived in 2020. If you have an IRA at Bragg, please reach out if you would like to discuss your RMD plans for the year. We will study your circumstances and review assets outside of your IRA to potentially fund your draw in 2020. We will also recommend you bring your CPA into this conversation as soon as possible. Your CPA will most likely be finalizing your 2019 tax returns over the next 2-3 months. After your 2019 return is complete, your CPA can project your 2020 income tax. It is helpful for your CPA to know if you’d like to skip your RMD this year, as this will impact your projected income and tax withholding, which could in turn affect the amount of your quarterly estimated income tax payments. Also, in past years, in order to eliminate the need for quarterly payments, some CPAs and clients have opted to withhold a larger amount of tax than attributable to the income from the IRA distribution. Keep in mind, if you decide to skip your 2020 IRA distribution and associated tax withholding, quarterly payments may be needed or may need to be adjusted for 2020.

Your CPA can also project whether you will take the standard deduction or itemize in 2020. This is important if you’ve gotten into the habit of making charitable gifts from your IRA (via a QCD). Even though RMDs are not required for 2020, QCDs can still be made for those over age 70 ½. But, should you gift via QCD if you are not taking your RMD? As usual, it depends:

• If you will most likely itemize your deductions in 2020, a gift from your non-IRA accounts will be preferable. It’s best to gift from your checking account for small gifts. For larger gifts, donating highly appreciated stocks/mutual funds from your taxable investment account would be more advantageous. If you have an active Donor Advised Fund, you can also itemize contributions to it.
• If you are not likely to itemize your deductions in 2020, a gift from your IRA (QCD) is a good option. Although this gift will not reduce your taxable income for the current year, you are giving away pre-tax assets completely tax-free and effectively lowering your IRA balance which in turn reduces future year mandatory RMDs.

As always, please reach out to us at Bragg to discuss your circumstances and planning. We imagine this will not be the last time the rules change. We are grateful you allow us to navigate these changes with you and appreciate all the inquiries in how we at Bragg and our families are doing. We are doing well and thank you for giving us such purpose and joy in our work!

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.