Now that we have had some time to look at the SECURE Act, some provisions that failed to get a lot of attention initially can be looked at in more detail.  Specifically, I wish to look at the interesting provision that reduces qualified charitable distributions if a taxpayer makes a post-age 70 ½ deductible contribution to an IRA under the new law and a change made to the kiddie tax provision between the time the original SECURE bill passed the House earlier in 2019 and when it finally passed the entire Congress in December.

QCDs and Post-Age 70 ½ Deductions for IRA Contributions

The new tax law does come with one negative that occurs if a taxpayer makes a deductible IRA contribution after attaining age 70 ½.  The taxpayer’s ability to claim a qualified charitable contribution from the IRA is reduced to take into account any previous post-70 ½ deductible IRA contributions.

IRC §408(d)(8)(A) provides that the qualified charitable distribution for any tax year is reduced by:

• The total deductions allowed under IRC §219 for all tax years ending on or after the date the taxpayer attained age 70 ½ over

• The total actual reductions in QCDs already taken into account under this rule in prior years.

Some examples of the application of this provision are provided below.

EXAMPLE 1

Wayne attained age 70 ½ in 2020.  He makes a $5,000 contribution to a traditional IRA in 2019 for which he claims a $5,000 contribution in 2020 under IRC §219 on his Form 1040.  He also makes an otherwise qualified charitable distribution (QCD) under IRC §408(d)(8) of $50,000.

Since he was allowed a $5,000 deduction on his tax return for 2020 and no reductions could have taken place on prior year returns, he must treat only $45,000 of the distribution as a qualified charitable contribution, excluded from his gross income for the year.  The first $5,000 of that distribution will be a standard taxable distribution.  However, Wayne should now be able to claim that $5,000 as a charitable deduction on Schedule A, assuming he otherwise itemizes deductions on his return for 2020.

EXAMPLE 2

Continuing with EXAMPLE 1, assume Wayne makes no contribution to a traditional IRA in 2020 and, thus, claims no deduction under §219 in 2020.  He makes another $50,000 otherwise qualified charitable distribution in 2021.  Since the $5,000 deductible contribution had already been fully absorbed by reducing his 2020 QCD amount, the entire $50,000 is treated as a QCD on Wayne’s 2021 return.

EXAMPLE 3

Assume the same facts as in EXAMPLES 1 and 2 except Wayne does not make any QCD in 2020.  Now when Wayne makes the $50,000 otherwise qualified charitable contribution in 2021, he must reduce that year’s QCD by $5,000 since none of Harry’s post-age 70 ½ deductions under §219 had been offset against prior year charitable distributions.

Kiddie Tax

The Act removes the special alternative minimum tax rules under IRC §59(j) that apply to the Kiddie Tax from 2018 to 2025.[1]

One change made in the SECURE Act included in the Further Appropriations Act, 2020 as compared to the version that passed the House of Representatives earlier in 2019 involves the option to choose between using trust rates or the parents’ rates when computing the kiddie tax.  In the bill that passed the House, the option was only available for tax years of the taxpayer that began in 2018.

The final version of the bill expanded that to cover tax years of the taxpayer beginning in 2019 as well as 2018, so the taxpayer can elect to use trust rates in either or both years, rather than using the rates of the parents.[2]

[1] IRC §55(d)(4)(A)(iii) as revised

[2} Act Section 501(c)(3)