A new IRA donation strategy now can increase your tax savings later

The coronavirus stimulus legislation tweaked the rules for IRA payouts, so savers who make charitable donations from those accounts may want to shift their giving plans.

  • By Laura Saunders,
  • The Wall Street Journal
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It’s a confusing year for charitably minded seniors with traditional individual retirement accounts—and a good one to reconsider giving strategies.

Recent law changes are responsible. Late in 2019, Congress raised the age at which most savers are required to start taking money from their IRAs to age 72 from age 70½. But it left unchanged the age at which savers can donate IRA assets, which is still 70½.

Then this year, Congress suspended the mandated IRA payouts, known as required minimum distributions, or RMDs, for 2020 due to the coronavirus pandemic. The suspension gives savers’ nest eggs a chance to recover from market losses. Lawmakers also provided a tax-efficient path for IRA owners who want to make very large donations of more than $100,000.

These changes are affecting strategies for seniors who use a popular tax break to do their charitable giving in a tax-efficient way. The break, formally known as a Qualified Charitable Distribution, allows them to donate IRA assets directly to charities.

As a result of the changes, some charitably inclined IRA owners who don’t have to take RMDs this year will want to maximize tax benefits by skipping 2020 IRA donations and making a double gift next year. Others may opt to donate IRA assets rather than cash or assets such as stock this year, even without RMDs.

Still others may ignore tax strategies because of the coronavirus’s ravages.

“Charities need money now, and for some givers this is what matters most,” says Natalie Choate, an attorney with Nutter, McClennen & Fish in Boston. Ms. Choate makes nearly all her charitable donations with IRA assets and will likely do so this year.

Here’s what traditional IRA owners who are thinking through giving decisions need to know now.

First, be aware of what hasn’t changed: IRA owners age 70 ½ and older can donate up to $100,000 of assets directly to qualified charities (but not donor-advised funds). Donations up to the limit count toward the RMD from the IRA, if there is one.

There’s no deduction for these donations, but they don’t raise adjusted gross income. The advantage of minimizing this income is that it can reduce other levies based on adjusted gross income. These include income-based Medicare Part B and D premiums and also a 3.8% surtax. The 3.8% surtax applies to net investment income such as dividends or capital gains, and the threshold is AGI of $250,000 for most married filers and $200,000 for most single filers.

Unlike writing a check, using IRA assets to make donations also provides a tax break for charitable giving even if the donor doesn’t itemize deductions on Schedule A—as many seniors don’t.

Now here’s what makes this year different for IRA donations.

Because RMDs aren’t required for 2020, an IRA donation this year can’t reduce them. As a result, many IRA owners who normally have RMDs can get a bigger tax break by making two donations in 2021 rather than one each in 2020 and 2021, says Lawrence Katzenstein, an attorney with Thompson Coburn in St. Louis.

For example, say that an IRA owner has a required withdrawal of about $40,000 a year and typically gives $10,000 to charity. She won’t be able to use a 2020 donation to reduce her 2020 RMD. But she could defer the 2020 gift into early 2021 and make two $10,000 donations in 2021.Then she’d report $20,000 of taxable IRA payout next year, not $30,000.

Mr. Katzenstein adds that wealthy donors who want to give more than $100,000 of IRA assets also have a new way to do it this year only, due to a provision in the newly passed Cares Act stimulus legislation. Instead of giving IRA assets directly to charities, they can withdraw cash from IRAs and make cash charitable contributions free of percentage limitations that often crimp such gifts. To learn more, consult a tax adviser.

Finally, there’s a new cohort of IRA owners who are now old enough to donate assets at age 70½, well before they have to take required payouts at age 72. This year they join the millions of IRA owners who can make donations but whose RMDs are suspended for 2020.

How can these givers maximize their charitable tax breaks, other than by waiting to donate until they have RMDs? Unless they’re very wealthy, says Ed Slott, an IRA specialist who is an accountant in Rockville Centre, N.Y., they often should donate IRA assets rather than cash or appreciated assets such as stock.

This may seem surprising. Donations of appreciated assets, such as shares in taxable accounts, often allow the giver to skip capital-gains tax on the growth and take a deduction for the gift’s full market value. This powerful strategy is a favorite with wealthy donors who give more than the $100,000 annual limit allowed for IRA donations.

But for lesser givers age 70½ and older, Mr. Slott advises donating IRA assets first and trying to hold appreciated assets such as stock until death. At that point, a provision known as the step-up forgives capital-gains tax on the asset’s growth.

Says Mr. Slott, “Your heirs will thank you if you leave assets in taxable accounts rather than traditional IRAs, because the IRAs come with taxes due.”

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