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The SECURE Act and Gift Planning

Source: PG Calc Blog

After lingering in limbo in the U.S. Senate for months, the “Setting Every Community Up for Retirement Enhancement” Act, aka the SECURE Act, was among several bills attached recently to a “must-pass” appropriations bill that was signed into law on December 20, 2019. The SECURE Act includes many changes to the rules governing retirement plans, including several provisions of particular interest to gift planners. All the rules described below became effective on January 1, 2020.

After lingering in limbo in the U.S. Senate for months, the “Setting Every Community Up for Retirement Enhancement” Act, aka the SECURE Act, was among several bills attached recently to a “must-pass” appropriations bill that was signed into law on December 20, 2019. The SECURE Act includes many changes to the rules governing retirement plans, including several provisions of particular interest to gift planners. All the rules described below became effective on January 1, 2020.

1. RMD starting age increased from 70½ to 72. 

The age at which the owner of an individual retirement account (IRA) must start taking required minimum distributions (RMDs) has increased from 70½ to 72. This change means that IRA owners who turn 70½ in 2020 or later can accumulate assets tax-free in their IRAs for, on average, an additional one-and-a-half years before they must start taking minimum distributions. This change also applies to 401(k)s and other qualified retirement plans.

The minimum age for making qualified charitable distributions (QCDs, aka charitable IRA rollovers) from an IRA remains 70½. However, fulfilling an RMD will no longer be an incentive for a donor between age 70 ½ and age 72 to make a QCD. On the plus side for fundraisers, donors who do delay making QCDs until their RMDs kick in at age 72 will have larger IRA balances, and hence larger RMDs, than they otherwise would have had, so these donors will have an incentive to make somewhat larger QCDs than before. For donors who take the standard deduction rather than itemize, using QCDs to make charitable gifts will remain the most tax-efficient way to make gifts once they reach 70½ and before they are required to take their RMD at 72.

2. No age limit on traditional IRA contributions for working IRA owners. 

There is no longer an age limit on making contributions to a traditional IRA for IRA owners who continue to work beyond age 70½. This change will enable these IRA owners to accumulate greater amounts in their IRAs, as ROTH IRA owners were already able to do. As explained below, these additions will not necessarily translate into larger QCDs.

Deductible amounts that an IRA owner contributes after reaching age 70½ will reduce, dollar-for-dollar, the amount of a QCD that can be excluded from the donor’s income. For example, if the donor of a $50,000 QCD has contributed $20,000 to her IRA since turning 70½, only $30,000 of the QCD will be excludable from her taxable income. The donor will be able to itemize the other $20,000 as a charitable deduction, but due to deduction limitations and other factors, this deduction may or may not completely offset the $20,000 of additional taxable income. If the donor above makes no further IRA contributions and makes another $50,000 QCD in a subsequent year, all $50,000 will be excludable from her taxable income because she included the $20,000 in her income previously. Needless to say, this rule complicates the decision to make QCDs for IRA owners who make deductible contributions to their IRA when older than 70½.

3. “Stretch” IRA eliminated for most non-spouses. When a deceased owner’s IRA is inherited by a non-spouse who is more than 10 years younger than the deceased, no longer can the new owner “stretch out” distributions over her life expectancy. Instead, the new owner must empty the inherited IRA within 10 years (unless the heir is a minor child of the deceased owner, chronically ill, or disabled). However, there are no RMDs during the 10 years. The owner can take distributions any way she wants as long as she withdraws all funds within the 10 years. Designated beneficiaries of IRAs inherited prior to 2020 are grandfathered in under the old rules; they can continue to take distributions over their life expectancies.

The elimination of the “stretch” IRA for non-spouses will discourage IRA owners from passing on their IRAs to family members who are much younger than they are, such as children or grandchildren. For charitably minded IRA owners, the elimination of the “stretch” IRA creates an additional incentive to designate what’s left in their IRA to one or more charities and use other funds to benefit their heirs. Doing so will avoid income tax on the IRA funds because charities are tax-exempt and provide heirs with funds on which they won’t need to pay income tax. For donors with large IRAs (or other qualified retirement plans) who wish to provide lifetime income to heirs and make a generous gift to charity, designating a testamentary charitable remainder trust as the beneficiary will be more attractive under the new law, since a popular non-charitable alternative for providing lifetime income to heirs – the “stretch” IRA - is no longer available.

What Should You Do?

There are several steps you can take to make your supporters aware of the new rules found in the SECURE Act.

1. Review the information about QCDs on your website and other marketing materials. Make sure they are up to date. In particular, if they mention using QCDs to fulfill your RMDs (using friendlier language, of course), they should mention that QCDs can start at 70½ while RMDs start at 72. They should also mention that retirement plan funds are the most tax-efficient way to make testamentary charitable gifts, whether outright or through a charitable remainder trust.

2. Include an article in your next newsletter about the changes and how using IRA funds can be a tax-wise way to support your charity, especially if you don’t itemize your deductions.

3. Consider a targeted mailing to your loyal donors who are 70 and older that highlights the changes and potential tax benefits of donating IRA and other retirement plan funds.

4. Train your staff to answer questions from donors about QCDs under the new rules and update your procedures, such as gift acceptance policies and gift acknowledgement letters for QCDs.

Conclusion

The SECURE Act made changes to the laws governing retirement plans that offer the potential, at least, to increase donations of retirement plan assets to charity. On the one hand, the increase of the age at which an IRA owner must take RMDs will remove one strong incentive for donors between 70½ and 72 to make QCDs, although larger IRA balances may lead to larger QCDs from age 72 onward. That said, a QCD between age 70 ½ and 72 offers non-itemizers the same tax benefits of an itemized deduction. On the other hand, the elimination of the “stretch” IRA gives IRA owners even more reason to designate IRA assets for charity and other estate assets for heirs. Perhaps most importantly, these changes give you a reason to get in touch with your charity’s donors, both to inform them about the changes and to remind them of your charity’s mission and how they can support it.

© 2020 PG Calc. All rights reserved.

CARES Act Includes Charitable Giving Incentives

Source: PG Calc Blog

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which the President signed into law on March 27th, provides more than $2 trillion in relief touching nearly every corner of the U.S. economy: large and small businesses, health care providers, non-profits, individual citizens, and on and on. Included in its 880 pages are several provisions of particular interest to gift planners and to fundraisers generally. Let’s go through them. I’ll start with the most dramatic change.

• 100% of AGI limit available in 2020 for cash gifts to most public charities: For the 2020 tax year only, donors may elect to apply a new 100% of adjusted gross income (AGI) limit to cash gifts to public charities (“50% charities”). Gifts to donor advised funds (DAFs) or supporting organizations (SOs) are not eligible for this special election. The 100% limit is reduced dollar-for-dollar by other itemized charitable deductions. This means that in 2020, a donor who deducts 30% of her AGI in long term appreciated property gifts and elects the 100% of AGI limit for qualified cash contributions will be able to also deduct up to 70% of her AGI for qualified cash gifts, a total deduction of up to 100% of AGI. If this donor uses all of her available deduction for qualified cash gifts, she would pay no federal income tax in 2020! Ordinarily, this donor’s total deduction would be limited to 60% of AGI and she would have to carry forward the rest. This change presents a big opportunity for attracting major gifts and planned gifts in 2020.

  A donor who makes the 100% of AGI election can carry forward unused qualified cash gift deductions up to 5 years. The carryforward will be subject to the normal 60% of AGI limit, as are cash deductions carried forward from past years.

  The 100% election may not always be the tax-wise choice: Because federal income tax rates are progressive, it is not a given that it will be to a donor’s advantage to make the 100% of AGI election. For example, a single donor who has taxable income of $200,000 is in the 32% federal income tax bracket. If the donor makes $200,000 in qualified cash contributions, makes the 100% of AGI election, and itemizes no other deductions, he will pay no federal income tax in 2020, saving $45,015.50 in tax as a result. However, if he doesn’t make the election, he would deduct $120,000 and carry forward $80,000 to 2021. Assuming he can deduct the remaining $80,000 in 2021 and again has taxable income of $200,000, he will save $31,625 in federal income tax in 2020 and approximately another $22,136 in 2021, a total tax savings over the two years of $53,761. A donor in the highest federal tax bracket, 37%, could see an even larger tax benefit by not taking the 100% election. Donors should consult their tax advisers to determine whether the 100% election makes sense for them.
  

• Non-itemizers eligible for $300 charitable deduction: A reduction in taxable income is available in 2020 for donors who do not itemize their deductions. It is an “above-the-line” adjustment to income that will reduce a donor’s AGI and thereby reduce taxable income. This adjustment is available for cash gifts to public charities (“50% charities”) only and is limited to $300 per taxpayer ($600 for a married couple). It is not available for gifts to DAFs or SOs, nor for cash deductions carried forward from prior years. While far more limited than above-the-line deductions or the “Universal Charitable Deduction” previously proposed by the charitable sector, this change will encourage the 90% of taxpayers who do not itemize to make more cash gifts in 2020. Donors who prefer to itemize their deductions can still itemize them (see (1) above).

  The text in the Act is ambiguous as to whether this provision applies just for the 2020 tax year or for future years as well. The best interpretation appears to be that it applies for 2020 only.
  

• Required minimum distributions waived in 2020 for most donors: Most donors will not have a required minimum distribution from their retirement plan in 2020. Minimum distributions will not be required from IRAs, 401(k)s, 403(b)s and most other defined contribution plans maintained by an employer for individuals. Minimum distributions that have already started are still required from defined benefit pension plans and some 457 plans. However, required minimum distributions that would have had to start in 2020 don’t have to start until 2021, including distributions from defined benefit pension plans and 457 plans. This change will dampen somewhat the incentive for a donor to make a qualified charitable distribution (QCD) from her IRA in 2020. Even so, making a QCD this year will still allow itemizers and non-itemizers alike to direct up to $100,000 from their IRA to charities in a tax efficient manner.
  

• Limit on cash contributions from corporations increased to 25% in 2020: The taxable income limit that applies to cash contributions made by corporations to “50% charities” (again, except DAFs and SOs) is increased from 10% to 25% for 2020. The usual 10% limit still applies to other charitable contributions by corporations, and those contributions reduce the 25% limit dollar-for-dollar. Qualified cash contributions in excess of the 25% limit can be carried forward for up to 5 years under the usual limits. This change should encourage more corporate giving than would have otherwise occurred this year.
  

• Limit on contributions of food inventory increased to 25% in 2020: The limitation on deductions for contributions of food inventory by any trade or business is increased from 15% to 25% for 2020. This change should encourage more food donations in 2020 from businesses of all types.
  

The CARES Act has been made necessary by a terrible pandemic. Foremost in the minds of your donors are acute concerns about their continued health and financial wellbeing and of those they care about. Nevertheless, many of them are also eager to do what they can to help others less fortunate. Contact your donors, ask how they are doing, and remind them that with their help your organization can continue to improve lives in the face of the coronavirus crisis and beyond.

© 2020 PG Calc. All rights reserved.