Qualified Charitable Distribution Rules Altered by Secure 2.0 Act of 2022

Considerations for planning to meet your philanthropic goals

Qualified Charitable Distributions (QCD) are a valuable tax planning technique for individuals over age 70.5 to meet their philanthropic goals, utilizing a less estate tax efficient asset. The Secure 2.0 Act of 2022 (SA 2.0) made two notable adjustments to the RMD rules favorable to the taxpayer.

Increased required minimum distribution age to 73

For taxpayers who reach 73 on or after December 31, 2022, the Required Minimum Distribution (RMD) start date is delayed to age 73. SA 2.0 did not provide any adjustments to the RMD QCD rules so the qualifying age for QCD treatment remains unchanged at age 70.5. This means while a taxpayer may wait until they reach age 73 to start RMD payments, a taxpayer may start to use IRA assets to fund charitable obligations via QCD once they are age 70.5. A taxpayer aged 70.5 may consider an inherited IRA as a source of funding for the QCD transfers. At the end of 2032, the RMD age will increase to 75 for those that turn 74 after December 31, 2032.

A qualifying taxpayer can make direct transfers from an IRA account of up to $100,000 per year to a qualifying charity (up to $200,000 for married filing jointly taxpayers) to allow the transfers to qualify as QCDs. This is a per taxpayer limit and may not be combined to use just from one taxpayer’s IRA account. The IRS announced in November 2023, the per taxpayer limit will increase to $105,000 per taxpayer to incorporate the indexing for inflation provision in SA 2.0.

QCD treatment allows the taxpayer to reduce the gross RMD income via a reduction of income. For some taxpayers who do not itemize deductions or for those that plan and bunch their deductions in some years qualify to itemize deductions, QCD allows a reduction to income even if the taxpayer would not qualify to itemize for the tax year. In addition, the reduction to income classification may yield other benefits for the taxpayer as some phaseout and other limitations are based on adjusted gross income so QCD treatment may provide opportunities to the overall tax liability.

In planning for and using QCD as a tool, taxpayers must consider applicable limitations. Certain charities are not eligible to receive QCDs, including donor-advised funds, private foundations and supporting organization and any charity where the contribution bestows certain benefits on the donor such a certain college athletic foundations.

Adjustments to use of QCD to fund charitable split interest entity

The Secure 2.0 Act of 2022 provides each taxpayer may make a lifetime transfer of up to $50,000 of QCD funds to a split interest charitable entity such as a charitable remainder unitrust, a charitable remainder annuity trust or a charitable gift annuity starting in 2023. SA 2.0 provides indexing for inflation of the $50,000, starting in 2024. The IRS announced the maximum limit starting in 2024 will be $53,000 in November 2023.

A charitable split interest entity provides a recurring income stream to the donor and the spouse or to a designated beneficiary, depending on entity type and who is designated as beneficiary. The term of the income stream is dependent on charitable split interest entity type and terms of duration for the income stream. At the end of the term, the charity keeps the funds remaining.

To qualify certain rules must be met:

• The gift must be funded directly from an IRA account using a QCD;
• The charitable split interest entity may only be funded by QCD so they QCD may not add to an existing charitable split interest entity;
• The maximum lifetime amount is $50,000 per IRA owner, indexed for inflation starting in 2024 (2024 amount is $53,000);
• The annuity cannot be assignable;
• The annuity payment can only benefit the IRA owned and/or spouse;
• The CGA has to provide at least 5% per year to the recipients;
• The first CGA payment must be issued no later than one year from the date of the contribution.

Because the taxpayer has no tax basis in the IRA funds, the annuity distribution will be classified as ordinary income.

Read the article linked below to learn about other benefits of QCDs .