The SECURE Act
The SECURE Act, passed in late 2019, includes provisions that may impact charitable giving.
1. IRA owners who turn 70½ in 2020 or later can wait until the year they turn age 72 to begin taking required minimum distributions. They may, however, begin making tax-free qualified charitable distributions from their traditional and Roth IRAs after reaching age 70½.
2. The “stretch IRA” is eliminated for most beneficiaries. Previously, a younger family member could be named beneficiary of an IRA and take distributions in smaller annual amounts, over his or her life expectancy. This allowed the IRA to continue growing tax sheltered and spread the income taxes owed on distributions over potentially many decades. With a few exceptions, the stretch IRA is now available only for surviving spouses. A non-spouse generally must distribute the entire IRA within ten years, which may result in higher income taxes.
Charitable opportunity: IRA owners may have all or a portion of their accounts pass to a charitable remainder unitrust that makes payments to younger family members. Not only do beneficiaries receive payments for life, similar to the stretch IRA, but when the trust ends, remaining assets pass to charity. If the IRA owner’s estate is subject to tax, an estate tax charitable deduction is available for the value of the remainder interest in the trust.
The SECURE 2.0 Act
In late 2022, the SECURE 2.0 Act was passed, with several provisions affecting charitable donors:
1. The age at which required minimum distributions from retirement accounts must begin is gradually being raised. In 2023, the age is increased from 72 to 73 for those reaching age 72 after 2022. By 2032, the age increases to 75. IRA owners can continue making qualified charitable distributions (QCDs) directly to charities at age 70½.
2. Donors eligible to make QCDs can make a one-time election to establish a charitable remainder trust or charitable gift annuity of up to $50,000 from their IRAs. The donor and/or spouse are the only permissible recipients and no additional funds may be added to the remainder trust or gift annuity. All payments received by the donor are taxed at ordinary income rates.
Provisions and Strategies for Charitable Giving in 2023
Here are some charitable giving strategies to consider:
1. Qualified charitable distributions (QCDs) from IRAs are advantageous for eligible donors. Although no charitable deduction is available, the income tax that is normally owed on withdrawals is avoided. In addition, because QCDs can satisfy required minimum distributions, income tax savings can be realized. QCD rules:
- Donors must be at least age 70½ on the date of the gift.
- QCDs can come only from IRAs, not 401(k)s or other retirement accounts.
- A maximum of $100,000 may be given annually.
- The transfer must come directly from the IRA custodian. If the IRA owner has check-writing privilegs, a check from the account qualifies.
- QCDs can be made only to public charities, not to private foundations or donor advised funds.
- Distributions can be used to satisfy a donor’s pledge.
2. Life-income gifts such as charitable remainder trusts and charitable gift annuities offer several advantages to satisfy philanthropic goals. Because deductions for remainder trusts and gift annuities tend to be larger, donors may be able to itemize in the year a gift is arranged. Payments from life-income gifts may be attractive to donors who would normally make bequests to charity through a will or living trust, providing income tax, and possibly capital gains tax, savings.
3. Making gifts of highly appreciated assets allows donors to avoid the capital gains tax that would be due if the assets were sold, offering tax savings even if the taxpayer uses the standard deduction.
4. Those with donor advised funds can direct gifts to public charities. A donor may be able to itemize by making a larger gift to a donor advised fund, from which annual gifts can be made over several years. Contributing appreciated securities to a donor advised fund provides added tax savings.
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