Ian Berger, JD
Would you like to make charitable donations from your IRA but aren’t eligible for a qualified charitable distributions(QCD) because you’re under age 70 ½? Are you eligible for QCDs but want to donate more than the $100,000 annual limit? Are you interested in making charitable gifts from your 401(k) or other company savings plan? If you answered “yes” to any of these questions, you should be aware of a tax strategy just just for 2021 that we call the “Mega QCD.”
QCDs are a great way to transfer funds from your IRA directly to charity. The IRA withdrawal doesn’t count as taxable income, making it especially valuable if you’re taking the standard deduction rather than itemizing deductions on your taxes. QCDs can also be used to satisfy any required minimum distributions (RMDs) you must take in the year of the QCD.
But QCDs have restrictions. You must be age 70 ½ or older to use them. Annual QCDs are limited to $100,000 per person. And, QCDs can only be made from IRAs – not company plans.
For 2021 only, there’s a way to get around each of these limits. Normally, your itemized deduction for charitable contributions in a year can’t exceed 60% of your adjusted gross income (AGI). But Congress suspended the 60% charitable deduction limit for 2020 cash donations and extended that suspension to 2021. (This was done to try to help struggling charities during the pandemic.) So, for 2021, any cash gift to charity – no matter how large– can be deducted up to your AGI.
This means you can take any withdrawal from your IRA or company plan during 2021 and turn around and donate that same amount to charity. The distribution will be taxable to you as AGI, but because of the suspension of the 60% limit, all of that AGI will be wiped away from your taxes as a charitable deduction.
Since the Mega QCD isn’t technically a QCD, you’re not limited to $100,000. And, unlike a QCD, you don’t have to be 70 ½ to use the strategy. (Just remember that if you’re under 59 ½, you’ll be hit with a 10% early distribution penalty that can’t be wiped away.) Even better, the Mega QCD can be used for company plans as well as for IRAs – as long as you’re eligible for a plan withdrawal.
A few caveats: If you’re required to take 2021 RMDs, the Mega QCD can’t be used to offset RMDs like QCDs can. But there’s nothing preventing you from doing a QCD up to $100,000 to offset any RMDs and also using the Mega QCD to make charitable gifts beyond $100,000.
Also, many additional taxes, credits and deductions (like medical expense deductions, Medicare IRMAA charges and taxation of Social Security benefits) are tied to AGI. IRA or company plan withdrawals, even if deductible, can boost your AGI and may raise your taxes. Finally, the Mega QCD is available for 2021 only and only works if you’re itemizing deductions.
By all means, talk to your financial advisor or CPA before pulling the trigger on this strategy.