Once upon a time, the consensus was to sock money away into your retirement plan, taking a generous tax deduction, because you were going to be in a lower tax bracket in retirement. Plus, at your death, your children or grandchildren could receive those funds and enjoy a lifetime income stream. Real life hasn’t exactly worked out like the fairy tale.

In 2020 Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The bill was a response to the economic fallout of the COVID-19 pandemic in the United States. Unfortunately, there were zingers also thrown in with the stimulus:

ZINGER 1 – Schedule A Changes

In order to “simplify the tax structure” the CARES act raised the Standard Deduction and lowered or eliminated certain Itemized Deductions. For 2024 the Standard Deduction is now $14,600 (Single) and $29,200 (Married Filing Jointly)

Then Congress monkeyed with Itemized Deductions. Prior to the CARES act, the “Big Three” Itemized deductions were Mortgage Interest, SALT Deductions (state and local income, sales tax, and property taxes), and Charitable Gifts. Most notably was the CARES Act’s capping of the SALT Deduction to $5,000 (Single) or $10,000 (Married). This had been one of the major itemized deductions for most of our clients – particularly those who were nearing retirement and had paid off their mortgage. Between State Income Taxes and Property Tax, it wasn’t unusual for us to see a $70,000 to $100,000 deduction in this bucket. No more.

Here was the problem: The Standard Deduction became like a Deductible on your Health Insurance, only this was on your tax deductions. If you had no deductible mortgage interest and SALT deductions were capped, the first $19,200 of Charitable Gifts were effectively “not deductible.” You just took the Standard Deduction. This change created great concern in the non-profit world about the potential impact on their future funding.

ZINGER 2 – Required Minimum Distributions on Inherited IRAs 

Prior to the CARES Act, an adult child could inherit your IRA and pay an RMD based on their life expectancy, not yours. That meant a 46-year-old child would be required to withdraw 1/40^th of the IRAs value, prior to the CARES Act. The CARES Act changed this to where they must now withdraw an average of 1/10^th of the IRAs value! (*while they have some flexibility on the annual amount, the entire balance must be withdrawn over 10 years). Remember, this entire amount is taxed as Ordinary Income. Thus, for every $1,000,000 they inherit, an average $100,000 is added to their existing annual taxable income. (*see above) This dramatically reduces the after-tax value of the gift.

How did these changes impact planning strategies? 

Because of the changes in Itemized Deduction rules and RMD rules, the old way of thinking became less attractive. All was not lost. There was an interesting tool that had been created in the Pension Protection Act of 2006 – the Qualified Charitable Distribution (QCD). This allows you to make a gift to a charity directly from your IRA without being taxed on the distribution. Plus, this distribution counts toward your Required Minimum Distribution. There is a $100,000 annual QCD gift limitation for individuals 70½ and older (RMDs aren’t required until you are 73, but you can start QCDs at 70½).

QCDs have changed the value proposition for IRA Rollover accounts. While they are still retirement income engines, they are no longer as effective as Family Legacy Creators. That feature has now been replaced and they are more attractive as Charitable Legacy Creators. In addition to being able to control your taxable income in retirement, you can grow your non-qualified assets which will receive a stepped-up basis at your death. You heirs will receive these assets virtually free of a tax burden. You will no longer need to deplete your cash assets in order to make charitable gifts, as those are now better funded directly from your IRA.

I have also observed a behavioral change in clients who are actively using QCDs. There’s a huge difference between making a $10,000 charitable gift out of your checking or savings account versus having $10,000 transferred out of a $4 million IRA that is likely to grow, not shrink over the next few years. The first option carries more of a feeling of loss than the second option. My sense is that people are feeling more free to support the organizations that reflect their hopes, vision and values – today. They don’t have to wait until they die to make a financial difference. They get to see the positive impact that their gift makes during their lifetime. 

Some clients with large IRA balances (and very large RMD obligations) are maxing out the $100,000 limit each year. Others are making annual commitments of QCDs over a number of years to fund significant gifts. Yet, whether large of small, these gifts can make a big difference, particularly to local charities. If we can help model the impact of specific charitable gifting you’ve thought about or want to consider, just let us know. You might be amazed with what you could accomplish!

Rick Adkins, CFP®, ChFC, MBA

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