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The recent coronavirus relief legislation, or CARES Act, made several important changes affecting charitable deductions as well as Required Minimum Distributions (RMDs). 

It increased the charitable contribution deduction that a taxpayer is entitled to claim for cash contributions made to most public charities during the 2020 calendar year. 

Prior to the CARES Act, contributing to public charities was limited to 60% of individuals adjusted gross income (AGI). Now, if you itemize, the limit has been increased to 100% of AGI. If you contribute more than your AGI, you can carry forward your deduction for five years.

The CARES Act also added a new deduction for taxpayers who do not itemize. For 2020, individuals who make a charitable contribution can take a $300 ($600 for joint returns) “above the line” adjustment. This adjustment reduces the AGI, and accordingly reduces your tax liability.

The law also changed the rules associated with RMDs for 2020. You no longer need to make any RMD withdrawals in 2020. 

This is very helpful because of the significant drop in equity prices this year. (Now, that money can remain in your account, potentially allowing you to recoup some of the investment losses from March and April.) 

These rules are applicable not only to individual retirement accounts but also to defined-benefit plans and 457 plans. 

Because there is no need to take unnecessary RMDs this year, which would raise your taxable income, taxpayers who normally make qualified charitable distributions (QCDs) directly from their IRA custodians may find it to their advantage to postpone charitable contributions to 2021 and make larger charitable contributions then. For the charity to be qualified, it must be eligible to receive tax-deductible donations. 

Main advantage

The advantage of the QCD is that these contributions reduce your adjusted gross income (AGI), and accordingly reduce your tax liability. 

By doing this, you may also minimize income-based Medicare Part B and D premiums, and even avoid a 3.8% surtax applicable to net investment income for taxpayers filing joint returns with AGIs above $250,000. 

The QCD rules apply only to traditional IRAs and not to distributions from SIMPLE IRAs, qualified employer plans, 403(b) plans or SEPS.

What if you’ve already taken your RMD?

Many individuals have already taken their required minimum distributions (RMDs) prior to the CARES Act being passed. Fortunately, the IRS allows (see Notice 2020-23) any distribution taken between February 1, 2020 and May 15, 2020 to be rolled over back into your retirement account if it is done by July 15, 2020. 

If you have had income tax withheld, you will not receive that back immediately. However, when you file your tax return for 2020, if you are entitled to a refund, you will receive back the income tax that was withheld.

If you took an RMD in January 2020, you have another option: The CARES Act allows those impacted by the coronavirus to take a loan from their retirement account up to $100,000, or the vested amount in their retirement account, whichever is lower, without penalty, and to repay it over a three-year period. The withdrawal is not taxable if you repay the loan within that period.

Regardless of distribution requirements, many taxpayers make QCDs to reduce tax liability. Even though minimum distributions are not required for 2020, the QCD remains a valuable tool to minimize your tax liability if you don’t itemize, and plan on making charitable contributions in 2020.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.

© 2020 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.