Financial Q&A: Charitable donations may mean more in 2020

Q. I normally take part of my required withdrawal by donating money to charity from my IRA. Since there is no requirement this year, can I double up next year? — Calvin

A. Calvin, even though Required Minimum Distributions are not required this year, you can still make charitable donations from your IRA in 2020. The ability to donate in that way is tied to age, not the distribution requirements so if you are moved to give, please do so. Many people are in need.  

Several years ago, §408(d)(8) became a permanent part of the tax code. It allows persons over age 70½ to make Qualified Charitable Distributions (QCD) directly from their IRAs. Retirement plans such as 401(k)s, 403(b)s are not eligible. If you are old enough, Qualified Charitable Distributions are a very tax-efficient way to gift to charity.

Each eligible traditional IRA owner can make as many contributions from any of their IRAs to an unlimited number of qualified charities, up to a total of $100,000 per IRA owner, per year. If you prefer to give nothing this year and twice as much next year, you can but keep in mind the 2021 cap will still be $100,000 in total.

In most cases, distributions from your IRA result in taxable income. However, if you make a QCD, the donated amount is not taxable. Despite this lack of taxation, the donation still counts toward your Required Minimum Distributions (RMD) for years in which RMD is enforced.

QCDs are most attractive to qualifying taxpayers that use the standard deduction and itemizers with deductions such as medical expenses, that are reduced as their adjusted gross income increases.

To make a QCD, verify that the charity qualifies. Most publicly operated charities are eligible, but donor advised funds, supporting groups, and certain trusts are not.

File a distribution request from the company holding your IRA. Most IRA providers provide the option to have the check mailed directly to the charity or to you so that you can present the check personally. Just make sure the check is made payable to the charity, not you, and is dated after the date on which you turn 70½.  

You will receive a 1099-R that will include the QCD as part of the gross distribution but be sure not to include the QCD as taxable income. For example, you distribute a total of $50,000 from your IRA with $40,000 going to yourself and $10,000 going to your church through a QCD. When you file your return, the 1009-R will show a gross distribution of $50,000. Enter $50,000 on Line 4a “IRA distributions” on your Form 1040. On line 4b “taxable amount” you would enter just $40,000. Most tax preparers place the letters “QCD” in the margin to signal why you are reporting $10,000 as non-taxable.

2020 has presented severe challenges for many people and nonprofits are stepping up to help. However, many charities are struggling themselves. Some donors have been hurt by the economic fallout of COVID-19 and many organizations have had to cancel fundraising events. Donations made now may be more impactful than ever.

If you want to learn more about local organizations and their activities, a great source for insight into the local nonprofit scene is the Community Foundation for Brevard, at www.cfbrevard.org.

Dan Moisand, CFP®, a past national president of the Financial Planning Association, has been featured as one of America’s top financial planners by at least 10 financial planning publications. He can be reached at www.moisandfitzgerald.com or 321-253-5400, ext 101.