Reversing a QCD in 2020 | Ed Slott and Company, LLC

Reversing a QCD in 2020

I made a qualified charitable distribution from my IRA in January 2020. Since the Cares Act suspended the RMD requirements for 2020, I now wish to reverse that transaction (by contributing the $100,000 back to my IRA by August 31, as permitted by a recent IRS announcement), and deduct the $100,000 instead of having it excluded from my income as a QCD. Since it would be a cash distribution to the charity, the limits on deductibility were waived for 2020 by the Cares Act, and I could deduct it in full.

If I can do this, must I have the charity return the money and give them a new check from me personally, or can I just repay the amount to the IRA and treat that as my direct payment to the charity to support the deduction?

I saw nothing in the IRS notice about the possibility of reversing a QCD after the RMDs for 2020 were suspended. Any guidance on this would be appreciated.

  • You do not need to have the charity return anything.  The distribution is a QCD only if you report it on your tax return as a QCD.  Under IRS Notice 2020-50 you have until August 31, 2020 to substitute other funds and complete the repayment of this distribution back to the distributing account of up to the amount that would have been RMD were it not for section 2203 of the CARES Act.  Once the amount is repaid to the distributing IRA it cannot be reported as a QCD and the contribution to charity must instead be reported on Schedule A or, if one does not itemize deductions, up to $300 as an above-the-line charitable deduction.
  • If this IRA is invested in a type of investment that would be subject to long-term capital gains treatment if invested similarly outside of the IRA, you might want to keep the distribution as a QCD on your tax return and invest the $100,000 in similar investments outside of the IRA.  This will reduce future RMDs by reducing your IRA balance, reduce taxes on subsequent gains on the $100,000 and allow a step-up in basis in these investments upon your death.

Thank you for the info and the advice, I think I'm going to do better than leaving the money outside the IRA and investing it in capital gain assets. After I do the rollover that reverses the QCD and generates a $100,000 deduction, I am going to convert $100,000 of the traditional IRA to my ROTH IRA. That will let me invest tax free in whateverm I wish to invest in. And the $100,000 charitable deduction will make the conversion tax free. In fact since the limits on deductibility of cash contributions directly to charities (not to donor advised funds) was eliminated by the Cares Act, anyone who is charitably inclined will be abl to convert to a ROTH and eliminate the tax. For example, you can convert $1,000,000 and elimiate the tax by making a $1,000,000 charitable contribution. And that $1,000,000 contribution can be made up of $300,000 in appreciated property, $200,000 in cash to your Donor Advised Charitable Fund, and $500,000 diirectly to charities other than a Donor advised fund -- the waiver of the limit for cash contribuyions can be "stacked" with the deduction of 30% of AGI to any charity and 20% in cash to any charity (including a Donor Advised Fund). Congress did it right this time in letting you "stack" these deductions, unlike the glitch that prevents you from doing that with the 60% limit that was enacted in the 2019 Tax Act for cash contributions (the glitch was never corrected by technical corrections). So I  suspect that very wealthy individuals who are charitably inclined are going to take this opportunity to convert all of their Traditional IRAs to ROTH IRAs.If you have sufficient assets, you can telescope the next several years of your planned charitable giving into 2020 and wipe out the tax on 2020 ROTH conversions.   If this just represents charitable gib=ving you were intending anyway, the conversions ar cost free -- I know I don't think of my planned charitable giving as a cost but as benefit both for the psychic benefits to myself and the tangible benefits to the charities. And we all know that in these hard tmes there are an awful lot of qualified charities than can use the money now. So it's really a win-win proposition.I hope a lot of people will consider it.

 

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