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A tax break for retirees is back. Here’s how to use it — and what to avoid.

Qualified Charitable Distributions, which allow Individual Retirement Account holders in their 70s and older to divert some of their federally taxable required distributions to charity while reducing their federally taxable income, are back after a 2020 hiatus.

Here, part of a 1040 federal tax form printed from the Internal Revenue Service website, in Zelienople, Pa. (Keith Srakocic/AP File)

Welcome to the height of tax prep season, with millions of people pressing to get their 2020 returns finished and filed.

But rather than talk about your 2020 taxes, let’s talk about a tax break for some of us that disappeared last year but is back in full force this year.

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This break is a fringe benefit of getting old. It lets some of us (including me) in their 70s and up use a tax strategy that got canceled for 2020 because of covid but is now back with us.

I’m talking about qualified charitable distributions, which allow individual retirement account holders to divert some of their federally taxable required distributions to charity. That lets the IRA holders make donations and reduce their federally taxable income — while still letting them take the standard deduction on their federal tax returns.

QCDs, as they’re known, weren’t all that big a deal until 2018, when — thanks to Donald Trump’s 2017 tax law — the number of people itemizing deductions (including charitable contributions) began to fall sharply to the current 11 percent or so from the previous 31 percent, according to a table on the IRS statistics.

I’ve written about QCDs on several occasions since I began using them myself three years ago. But this time around, I’d like to explain things in more detail. I’d also like to delve into some history and — with the aid of Professor Christopher Hoyt, who teaches about taxation and retirement plans at the University of Missouri-Kansas City Law School — explain the rationale behind some QCD rules that hadn’t made any sense to me.

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As a bonus, I’ll also warn you about a potential problem Hoyt brought to my attention.

For those of us who qualify to make QCDs, they’re as close to a free tax lunch as you can get these days.

Let me explain.

Tax laws let people put tax-deductible dollars into “defined contribution” accounts such as IRAs, 401(k)s and 403(b)s. But when you reach the age of 72, you have to start taking federally taxable “required minimum distributions” from those accounts.

Those RMDs, as they’re known, make sense: You and your employer (if you had one) deducted the money that went into these accounts, so it seems fair for you to have to begin taking money out of those accounts and paying federal tax on it.

The size of your required distribution depends on your year-end retirement account balances and your age. For example, if you had $100,000 in your retirement accounts last Dec. 31 and you turn (or have turned) 75 this year, your RMD is about $4,370.

If you are 80, it’s about $5,350. At 85, $6,760. Those amounts are based on life expectancies, so the older you get, the bigger your required distribution gets.

(If you inherited a retirement account before 2020, you had to immediately begin taking taxable distributions regardless of your age and could start making QCDs when you turn 70-1/2. If you inherited it in 2020 or later, you generally have to empty the account within 10 years and pay tax on the proceeds, but you don’t have to take annual distributions.)

Last year, QCDs ceased to be big tax savers because the Cares Act canceled RMD requirements for 2020. You could still use QCDs to make contributions last year, but their big tax advantage — reducing your taxable income by offsetting distributions you were required to take — went into hibernation for the year.

But this year, required distributions have returned, and QCDs have got their tax mojo back.

QCDs exist because charitable groups lobbied for them. They were created — on a temporary basis — as part of the Pension Protection Act of 2006. QCDs became permanent in 2015 as part of the PATH — for Protect Americans from Tax Hikes — Act. One of the great legislative acronyms.

To make a QCD, you either cut a check from one of your IRAs to a charity, or else have your IRA administrator send you or the charity a check made out to the charity. You can make up to $100,000 of QCDs a year, but only to registered charities. You can’t send them to your own donor-advised fund.

You can make QCDs only from IRAs — not from 401(k)s or 403(b)s. I never understood why, but Hoyt told me it’s because Congress didn’t want to subject employer plans such as 401(k)s to even greater bookkeeping requirements than they already have.

You have to keep track of QCDs yourself. Your retirement plan administrators send tax forms — known as 1099-Rs — to the IRS showing your total distributions for the year. You or your tax preparer have to subtract those QCDs from your 1099-R income. The plan administrator doesn’t do that.

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Why aren’t plan administrators required to put QCD numbers on your retirement income statements? Hoyt says that would require administrators to check every one of your QCDs to make sure it went to a registered 501(c) (3) charity. That would be a big, messy and expensive undertaking.

And now, to the problem, created — inadvertently — by the Secure Act of 2019, which allowed some people aged 70 ½ and up to make tax-deductible contributions to their IRAs.

The problem is that if you make tax-deductible contributions to an IRA that you’re using to make QCDs, it triggers a reduction in the amount of QCDs you’re allowed to deduct from your federally taxable income. It is, to use the technical tax term, a total hairball.

So if, like me, you’re making both QCDs and tax-deductible retirement account contributions, you’ve got to be careful not to trip over yourself.

Hoyt says the key is to make sure you’re not making QCDs from the same IRA into which you’re putting tax-deductible dollars. If, like me, you’re self-employed and have no employees, Hoyt says you can set up a solo 401(k) (which is what I’ve done) or a SEP-IRA and make deductible contributions to it. But, Hoyt warns, “avoid making QCDs from a SEP-IRA in the same year that you claimed an income tax deduction for contributing to the SEP-IRA."

Tax season isn’t fun. But if you’re part of the QCD world, next year’s tax season should be less painful than this year’s, because you’ll be able to see the benefit you got from making donations to charities you care about. That strikes me as a pretty nice deal.

Correction: An earlier version of this column contained outdated information about inherited retirement accounts. This has now been updated.