Unlocking the Impact of the Consolidated Appropriations Act of 2023 (CAA)
Strategies for utilizing Qualified Charitable Distributions to enhance your clients' philanthropic gifts.
Unlocking Your Impact
On December 23, 2022, Congress passed the momentous Consolidated Appropriations Act of 2023 (CAA), a colossal $1.65 trillion-dollar omnibus spending bill that touched upon numerous sectors. The ink had barely dried when President Biden signed the Act into law on December 29, 2022. Spanning over 4,000 pages, the CAA is a legislative behemoth, encompassing a myriad of provisions, but it's the content midway through that holds particular interest for those in the realms of law, accounting, and wealth management—especially those advising philanthropic clients.
At the heart of these provisions lies the eagerly anticipated "SECURE 2.0" legislation, building upon the foundations of the original SECURE Act of 2019 (SECURE stands for "Setting Every Community Up for Retirement Enhancement"). Within SECURE 2.0, we find the Qualified Charitable Distribution (QCD) enhancements that have been under development for several months.
The Top Three Provisions for Philanthropists
The new law introduces three prominent provisions that significantly impact philanthropists and their financial planning:
- Legacy IRA: Under the Legacy IRA provisions, taxpayers now have the option to make a one-time $50,000 QCD transfer to a charitable remainder trust (CRT) or other split-interest gifts like a charitable gift annuity (CGA). Notably, the legislation mandates that the CGA or CRT must be exclusively created to receive a QCD and contain only IRA assets.
- RMD Age Increase: Starting on January 1, 2023, the required minimum distribution (RMD) age, which currently stands at 72, will rise to 73. This age threshold is set to increase again, reaching 75 on January 1, 2033. Although this provision isn't directly linked to charitable giving, it will undoubtedly impact your clients' overall financial plans and may influence the timing and strategy of their philanthropic endeavors. A quick reminder: RMD refers to the mandatory withdrawal amount that taxpayers must take from qualified retirement plans, including IRAs and 401(k)s, among others.
- Indexed QCD Cap: The annual per-taxpayer QCD cap of $100,000 is now set to be indexed for inflation. This adjustment provides taxpayers with the opportunity to give even more directly from their IRAs to charitable causes.
Certain essential aspects of the landscape remain unaffected by these legislative changes:
- Eligibility for QCDs: To make a QCD, individuals must still reach the age of 70 ½. This provision allows taxpayers who aren't yet required to take IRA distributions under the RMD rules to utilize the QCD technique without incurring income tax on the distributed funds, simultaneously shielding those funds from future estate taxes.
- RMD Offset with QCDs: Taxpayers who are obligated to take RMDs can continue to count QCDs towards fulfilling their RMDs, effectively sidestepping the standard income tax applied to RMD dollars.
- Qualified Charities: Charities eligible to receive QCDs encompass designated funds, field-of-interest funds, and scholarship funds at the community foundation. However, donor-advised funds remain excluded from this list.
Three Ways to Gift a QCD
While clients can contribute various asset types to a donor-advised fund at the community foundation, it's essential to note that a Qualified Charitable Distribution (QCD) is an exception to this rule. A QCD enables taxpayers aged 70 ½ or older to execute a direct transfer of up to $100,000 annually from an IRA to a qualifying charity. Donor-advised funds do not qualify as eligible charities for this purpose.
Nonetheless, Athens Area Community Foundation offers alternative types of funds that can accept QCDs. These include designated funds and field-of-interest funds, which are often overlooked despite their potential for delivering significant value to both clients and the community. Clients can also opt to donate their QCD to the Athens Area Community Foundation's Pass-Through Fund, enabling distributions to multiple 501(c)(3) nonprofit organizations on their behalf.
Field-of-Interest Funds and Designated Funds
A "field-of-interest fund," as defined by the Council on Foundations, serves a specific charitable purpose, such as education or health research. This fund type allows clients to align their passions with their philanthropy by selecting a fund name (family, cause-related, or otherwise). The community foundation's knowledgeable team then distributes grants from the field-of-interest fund in harmony with the client's values and charitable preferences outlined in the fund documentation.
Designated funds, described as a type of restricted fund in which the beneficiaries are specified by the grantors, prove ideal for clients committed to supporting a particular charity or charities over multiple years. Clients name the fund, and the community foundation manages the distributions. Over time, these funds can contribute to the cash flow planning of the supported charity or charities, with distributions aligned with the client's specified wishes.
Sarah McKinney, President | CEO, in this brief video shares how a local community leaders utilized their QCD to set up a fund to benefit a local library.
Pass-Through Gifts Simplified
A pass-through gift represents a donation made to the Athens Area Community Foundation, accompanied by designated grants to 501(c)(3) nonprofit recipients. The foundation's qualified staff conducts due diligence on each nonprofit to ensure IRS compliance before disbursing the grants on behalf of the donor. This approach streamlines the administrative aspects of grantmaking, with a small pass-through fee assessed on the total donated.
QCD Reminders for the Savvy Client
For clients aged 70 ½ through 72, a QCD offers a strategic means of moving funds out of an IRA before they reach the age of 73 when Required Minimum Distributions (RMDs) come into play. This can reduce the eventual income tax liability associated with RMDs. Furthermore, for clients subject to RMD requirements, QCDs can be applied toward their RMD obligations, effectively excluding them from taxable income.
With the recent legislative changes, QCDs have gained even more popularity due to the indexed $100,000 cap and the introduction of a one-time $50,000 distribution option to a charitable remainder trust or charitable gift annuity.
Common Questions About Qualified Charitable Distributions (QCDs)
As Qualified Charitable Distributions (QCDs) become increasingly popular as a financial and charitable planning tool, they can also give rise to a slew of questions and uncertainties. Here, we address some of the most frequently asked questions by both advisors and donors, shedding light on the intricacies of this valuable strategy.
Is an IRA the Sole Eligible Source for QCDs?
While QCDs can originate from traditional IRAs or inherited IRAs, there are additional options. If an individual's employer no longer contributes to a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE) IRA, these accounts can also be used. In theory, Roth IRAs could serve for QCDs, but this is rarely advantageous, as Roth IRA distributions are already tax-free.
How Does a QCD Differ from an RMD?
Every individual must commence Required Minimum Distributions (RMDs) from their qualified retirement plans, including IRAs, when they reach the age of 72. These RMDs constitute taxable income. In contrast, a Qualified Charitable Distribution (QCD) involves a direct distribution from specific qualified retirement plans (such as IRAs) to particular types of charities. When conducted within the stipulated rules, a QCD can satisfy the taxpayer's RMD for that year, all without incurring tax on the distribution.
Can I Execute a QCD if I'm Not Yet Required to Take RMDs?
RMDs and QCDs both affect taxpayers in retirement age, but the age thresholds differ. Under the SECURE Act, the starting age for RMDs shifted from 70 ½ to 72, a move beneficial for taxpayers seeking to delay taxable income. However, no corresponding adjustment was made for the eligible age to perform QCDs, which remains at 70 ½. This benefits taxpayers who wish to utilize IRA funds for charitable gifts even before RMDs are mandated.
Can I Direct a QCD to My Fund at the Community Foundation?
Although donor-advised funds are ineligible recipients for Qualified Charitable Distributions, other fund types at the community foundation can accept them. These encompass designated funds, unrestricted funds, field-of-interest funds, and scholarship funds.
What Is the Maximum Amount I Can Give Through a QCD?
A Qualified Charitable Distribution permits you (and your spouse, from your spouse's own IRAs) to transfer up to $100,000 annually from an IRA (or multiple IRAs) to a qualified charity. As a married couple, you and your spouse may be eligible to direct a total of $200,000 annually to charities from your IRAs, effectively avoiding significant income tax liabilities.
These QCDs not only provide a tax-efficient avenue for philanthropic individuals but also empower them to make meaningful contributions to causes they hold dear, aligning their financial goals with their charitable aspirations. As these strategies continue to evolve, staying informed and seeking guidance from financial advisors and charitable experts can ensure that donors make the most of their philanthropic potential while optimizing their financial plan