A significant adjustment to qualified charitable distributions (QCDs) was noted in the official IRS Publication 590-B for the 2021 tax season, which was released on Feb. 28. The QCD adjustment impacts those over the age of 70 1/2 who make deductible IRA contributions.
“A QCD is normally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to a tax-exempt organisation.” You must have been at least 70 1/2 years old at the time the distribution was made,” Pub. 590-B states.
Changes to the Secure Act
In January, a draught version of Pub. 590-B said that “qualified charitable donations (QCDs) may be reduced.” Beginning with tax years beginning after December 31, 2019, your maximum annual QCD exclusion may require an adjustment.”
This is a result of the SECURE Act, which was signed into law at the end of 2019. The rule required taxpayers who made deductible IRA contributions after reaching the age of 70 12 (the age at which you can begin making QCDs) to reduce their QCD downward to account for the contribution.
The final Pub. 590-B addressed an issue in the draught Pub. 590-B (discovered in a spreadsheet used by taxpayers to calculate the adjustment), which I discussed in an earlier piece.
Clarification of QCD Adjustments
Not only has the new Pub. 590-B version made major changes to the worksheet, but it also includes additional details on how to assess the effect of deductible IRA contributions on QCDs. The section headed “Offset of QCDs by amounts donated beyond age 70 12” (Page 15) illustrates how to apply the QCD Adjustment Worksheet during a two-year period by using “Jim.”
Jim, who turned 70 12 in 2019, contributed $5,000 to his IRA in 2020 and 2021 but made no contribution in 2022. He made a 2021 QCD of $6,000 and a 2022 QCD of $6,500. (but no QCD for 2020).
However, because Jim contributed to a deductible IRA, these planned QCDs may not qualify for QCD treatment, i.e., they may not be excludable from income.
Is QCD Non-Excludable? Maybe. Perhaps Not.
What does it mean to be “excludable”? The QCD amount is deductible from gross income on a taxpayer’s tax return if the taxpayer meets certain criteria. Additionally, if you make deductible contributions to your IRA, the QCD must now satisfy another test.
Jim complied with the standards for eligible charities and direct transfers. What about his tax-deductible gifts, however? Will they work to ensure that his QCD is not excludable from his income? That is contingent upon the outcome of his Adjustment Worksheet.
Calculating The Adjustment
Jim now refers to the 2021 QCD Adjustment Worksheet.
Line 1 requests the “total amounts of [IRA] donations deducted in earlier years when you were age 70 12 or older that did not diminish the amount of excludable eligible charity contributions in prior years.”
Jim writes 0 because he is using this worksheet for the first time and will not be carrying over any deductible IRA contributions from a previous year’s worksheet. (In Jim’s 2022 spreadsheet, this circumstance changes.)
Line 2 requests the total amount of IRA contributions and withdrawals made during the current year if you were 70 12 (or older) at the end of the year. The form notes that if this is your first QCD worksheet (as it was for Jim), you must include contributions deducted in preceding years when you were age 70 12 or older at the end of the year. For Jim, this entails entering $10,000 for the sum of the 2020 ($5,000) and 2021 ($5,000) contributions.
Line 3 states that the sum of the amounts in lines 1 and 2 should be added. That is $10,000 in Jim’s case.
Line 4 denotes Jim’s QCD for the current tax year (2021), which was $6,000 in value.
Line 5 instructs to subtract line 3 from line 4 to obtain the current year’s amount of excludable QCD. It comes to a minus $4,000 in Jim’s instance. What happens now?
When Is A Qualified Continuous Distribution Not A Taxable Distribution?
The Adjustment Worksheet will determine whether or not your projected QCD is income excludable.
Line 5 contains an asterisk: “If zero or less, there is no excludable eligible charitable distribution.” If the value is greater than zero, put -0- on line 1 of the following QCD worksheet. If the value is less than zero, enter it as a positive value on line 1 of the ensuing QCD worksheet.”
Jim does not have any excludable QCDs for the fiscal year 2021. As a payout from his IRA, his QCD ($6,000) must be included in his gross income.
To resolve Jim’s negative $4,000 liability for 2021 and its carryover to 2022, consider the second scenario offered by Pub. 590-B.
The Tax Year Following
Jim’s 2022 tax year example begins with him completing the QCD worksheet and entering a positive $4,000 on line 1 (remember, “total amounts of contributions deducted in earlier years when you were age 70 12 or older that did not affect the excludable amount of QCD in prior years”). In other words, this was the sum that had no bearing on Jim’s 2021 QCD.
Jim made no deductible IRA contributions in 2022, so line 2 is zero, and adding lines 1 and 2 results in a total of $4,000 for line 3.
In 2022, his QCD for line 4 is $6,500. On line 5, Jim finds that after removing line 3 ($4,000) from line 4 ($6,500), his excludable QCD for the 2022 tax year is $2,500, which he can deduct from his gross income. Additionally, because $2,500 is greater than zero, Jim will enter 0 on line 1 of his 2023 tax year QCD form. Jim’s earlier deductible IRA contributions will have no effect on a 2023 QCD.
Consult Your Advisor
As always, consult your tax professional before acting on any general information. Each individual’s circumstance is unique; only your tax consultant can assist you in determining which IRA and QCD measures to take or not take. Additionally, you may wish to address any future intentions for QCDs and deductible IRA contributions.
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