QCDs are the most tax-efficient way to reduce taxable IRA balances, because they reduce the balances to a zero tax cost.
It’s important that you, as an advisor, identify clients who might benefit from qualified charitable distributions before year’s end, because the funds must come out of the IRA by that time for the client to qualify for the distribution. Don’t cut it too close. Get this done early in December.
Plus, don’t forget about the new $300 additional charitable gifting exclusion from income for non-itemizers (for cash gifts)—a provision in the CARES Act.
The legislation also removed the 60% adjusted gross income limitation for charitable gifts for those who itemize. However, since most people do not give that much, the QCD will still provide a better tax advantage. If a client does give that much in cash contributions, it would still pay to first use up the $100,000 qualified distribution limit as an exclusion from income, and then use the itemized deduction for further cash gifts that now (for 2020 only) can be taken without the 60% limitation.
4. Gifting
With the exploding deficits and expanding national debt, there is a new urgency for clients to make gifts now, before year’s end, because the golden age of gifting may soon grind to a halt. It’s time to play defense and protect your clients now. Gifts are lifetime transfers as opposed to inheritances received after death.
The 2020 estate and gift tax exemption is $11,580,000 per person ($23,160,000 for a married couple). These figures are scheduled to go back to $5 million and $10 million, respectively, after 2025 (there will also be inflation increases). However, these limits can easily be reduced much earlier by a revenue-hungry Congress. It pays to use them now or possibly lose them later. These limits apply to lifetime gifts as well as inheritances.
This strategy is mainly for your wealthier clients who may have an estate large enough to be subject to federal and possibly state estate taxes. These are probably your best clients, so they will value this advice. Whether they take it is a different story, since some (actually, many) clients have an aversion to parting with their money, even if the gifts go to their children or grandchildren.
Clients who have amassed these funds are still worried about losing control and about the possibility of the funds being squandered by those very same children or grandchildren, or the risk the funds could be lost in a divorce or taken by creditors. Of course, there are trusts available for these purposes, but that makes things more complicated.
Regardless, advisors need to present a year-end 2020 gifting plan now so clients can see the opportunities available to make tax-free gifts.
For clients who will be subject to a federal estate tax, gifting is less expensive because gifts are tax-exclusive, as opposed to inheritances, which are tax-inclusive. If the funds are left in the estate, the full value of the transfer at death is subject to the estate tax, so the funds used to pay the estate tax are taxed themselves, whereas gift taxes on lifetime transfers are only based on the gift amount received.
Advisors should talk to these clients and advise them of the gifting opportunities that are available now, and that might no longer be available after 2020.
There are three tiers of tax-exempt gifting:
1. The first is $15,000 annual exclusion gifts. These gifts can be made to anyone each year and they do not reduce the gift/estate exemption. These annual exclusion gifts are always tax free—even if the exemption is used up.
2. Unlimited gifts for direct payments for tuition and medical expenses. These gifts can be made for anyone, the amounts are unlimited, and they do not reduce the gift/estate exemption. These gifts are also always tax free—even if the exemption is used up.
3. The $11,580,000 lifetime gift/estate exemption in 2020. The IRS has stated that there will be no clawback if these exemptions are used now, even if the exemption is later reduced, so it’s important for clients to know they must use it or possibly lose it.