Each year, IRA owners age 72 and older must take a required minimum distribution (RMD). The RMD in nearly all cases is calculated using the Uniform Table. Under the Uniform Table, distributions generally start age 72 at approximately 3.7% and increase each year. The RMD must be taken on or before December 31 of each year.
Many IRA owners with significant balances take the RMD during the last quarter of the year. Because many individuals with larger IRAs do not require IRA funds for daily living expenses, delaying an RMD until the end of the year allows for additional tax-free growth in the IRA.
Fortunately, the IRA charitable rollover will qualify to satisfy a donor's RMD. The IRS term for an IRA charitable rollover is a qualified charitable distribution (QCD). IRA custodians may also use "QCD" to refer to this transaction.
There are five donor profiles for IRA rollover gifts. The first are the convenience donors, who find it to be a very simple and easy method for an end of year gift. The second is the generous donor, who wants to give more than the 60% of AGI limit. The third profile is a major donor that may be a generous individual who is looking for a favorable opportunity to make a major gift. Fourth, a Social Security recipient may want to reduce taxes with an IRA rollover gift. Finally, a standard deduction donor can also benefit from a QCD.
Many IRA owners delay taking RMD withdrawals until October, November or December each year. As the individual approaches the end of the year, he or she will need to make decisions on charitable giving. For an IRA owner who is already giving to charity during the year, QCDs are another good opportunity for gifting.
Convenience donors may contact their IRA custodians to arrange for an IRA charitable rollover. There is no charitable income tax deduction because there is no inclusion in federal taxable income. It is simply a very convenient way to help their favorite charity.
Some very generous individuals are already giving to the 60% of adjusted gross income deduction limit. This is the maximum deduction level under IRS rules to deduct cash gifts each year. Any gifts over this deduction limit may be carried forward and deducted over an additional five years. Some generous donors may also have a large IRA. Since they frequently live at a moderate level in proportion to their income and assets, they may not actually need all their IRA required minimum distribution.
If there is a desire to give more, donors can give up to 60% of adjusted gross income from their regular cash and then make an "over and above" gift from their IRA. These donors may in effect give nearly 100% of income per year through this method. Since the IRA rollover is not included in taxable income, it will have no impact on their regular income and ability to make other charitable gifts.
Board members, trustees and other major donors frequently have large IRAs. As the rules have continually become more favorable for IRAs and required withdrawals have been reduced, IRAs will continue to grow. Over longer periods of time, there are occasional market dips and drops, but the longer-term trend is positive and balances in IRAs will continue to increase.
For many professionals and business owners, the IRA may even become the bulk of the estate. They have a need to do some "asset balancing" to avoid future income tax problems. Therefore, it may be desirable for the major donor to give up to $100,000 per year to charity from his or her IRA. This provides the advantage of "balancing" the estate assets and reducing future RMDs from the IRA.
In addition, there may be income tax benefits. If the donor were to take the IRA distribution into his or her own personal income, the donor may be pushed into a higher marginal tax bracket or be subject to the alternative minimum tax. Thus, it may be preferable to make the gift directly from the IRA rather than making a charitable gift from regular income.
Social Security Donor
Social Security is subject to two levels of taxation. For donors who have income in excess of the first level, 50% of Social Security is taxed. For donors with income in excess of the second level, up to 85% of Social Security income may be subject to tax.
Withdrawing an amount from an IRA will potentially cause income to increase from the 50% taxable bracket to the 85% Social Security taxable bracket. Even though the withdrawn amount is given to charity and deducted, there still is increased tax on an IRA distribution to the donor. Thus, by making the transfer directly to charity, many Social Security recipients will reduce taxable income and save on taxes by using the QCD.
Standard Deduction Donor
Many seniors do not have a mortgage and their medical deductions are less than 7.5% of adjusted gross income. Thus, they use the standard deduction instead of itemizing.
If this donor withdraws $1,000 from his or her IRA and then gives it to charity, there is $1,000 of increased income with no offsetting charitable deduction because the standard deduction is taken. Therefore, it is preferable for all donors who take a standard deduction to make IRA rollover gifts directly to charity to avoid the additional taxable income.
An IRA charitable rollover offers many benefits to different types of donors. QCDs make it simple and easy to carry out a donors' philanthropic goals. The additional tax advantages of the IRA charitable rollovers make this a very attractive gifting opportunity for donors.
Late Special Use Valuation Permitted
In United States v. Ronald G. Parks et al.;
No. 2:21-cv-12676, a U.S. District Court determined that a five-year-late IRS Form 706 election for special use valuation under Section 2032A was valid.
Merle L. Parks created his Last Will and Testament on July 24, 2003. He passed away on September 19, 2003. His executor and nephew, Ronald G. Parks, inherited three parcels of farmland, cash, retirement accounts, stocks and bonds.
The estate tax return (with extensions) was due December 19, 2004. The estate paid tax of $333,959 but did not file an IRS Form 706. Five years later, in February 2010 the estate filed IRS Form 706. The estate elected a special use valuation under Section 2032A and claimed an overpayment of taxes of $87,838.
The IRS audited the estate and assessed a deficiency of $199,111. The IRS rejected the Section 2032A special use valuation on the grounds that the return was not timely filed. With interest and penalties, the IRS claimed the estate obligation in 2021 was $433,654.66.
The estate claimed that even though the tax return was five years late, it was permissible under Temp. Reg. 22.0(b) to file and make a Section 2032A election. The IRS argued that Temp. Reg. Section 22.0(b) was not applicable.
In 1980, Reg. 20.2032A-8 required a Section 2032A election to be made on a timely filed estate tax return. However, Section 2032A was amended in the Economic Recovery Tax Act of 1981 to state that the election was "permitted to be made on a late return, if that return is the first estate tax return filed by the estate." Regulation 22.0(b) states that "the election shall be valid even if the estate tax return is not timely filed."
The IRS claimed Reg. 301.9100-2 supersedes Temp. Reg. 22.0(b) and requires a special use election within 12 months after the due date for the return. The taxpayer claimed both regulations are applicable.
The District Court determined that the IRS had not demonstrated Temp. Reg. 22.0(b) had been superseded. In addition, the 2003 IRS Form 706 Instructions stated, "You may make the election under Code Section 2032A on a late filed return as long as it is the first return filed." Therefore, the District Court determined that based upon the Form 706 Instructions and Reg. 22.0(b), the late special use election was valid.
National Tax Security Awareness Week
Each year, the IRS Security Summit highlights risks to taxpayers during National Tax Security Awareness Week. National Tax Security Awareness Week highlights methods for taxpayers to protect personal information, for tax professionals to review security protocols and for businesses to be on the lookout for tax-related scams.
In IR-2022-202, the Internal Revenue Service (IRS) encouraged taxpayers and businesses to focus on security during the week of November 28, 2022. As part of those efforts, the IRS will host a webinar on November 29 titled "Deeper Dive Into Emerging Cyber Crimes and Crypto Tax Compliance."
IRS Acting Commissioner, Doug O'Donnell stated, "Taxpayers and tax professionals need to remain vigilant for increasingly sophisticated scams that look to steal sensitive financial information. The Security Summit effort focuses on highlighting simple steps that small businesses and people in all walks of life can take to protect their information, helping them avoid problems at tax time."
Neena Savage, President of the Board of Trustees for the Federation of Tax Administrators for Rhode Island, noted, "The heightened risk to taxpayers poses a real threat. The criminals continue to evolve and are always looking for opportunities to fraudulently obtain this information."
On Cyber Monday, taxpayers should review security best practices. Security software for computers and mobile phones should be regularly updated. Anti-virus software on computers should include a feature to stop malware and include a firewall. Everyone should use strong, unique passwords and two-factor authentication when possible. When shopping online, ensure a secure web site is used with "https" in the address and the padlock icon showing that it contains a security certificate.
Tax professionals should review basic security measures. They should also have two-factor authentication enabled on sensitive tax software accounts. If working remotely, set up a Virtual Private Network (VPN). Federal law requires tax professionals to have a written data security plan. Businesses must also educate employees on the latest phishing and phone scams.
Small businesses with 5 to 80 employees are the prime target for cyber attacks. These businesses must be vigilant and continue to upgrade their security practices. If there is a data theft, they can use the Business Identity Theft Affidavit, Form 14039-B to report the incident. Businesses should warn staff to be on the lookout for a W-2 scam that identity thieves frequently use to steal employee data.
Applicable Federal Rate of 5.2% for December -- Rev. Rul. 2022-22; 2022-49 IRB 1 (15 November 2022)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2022. The AFR under Section 7520 for the month of December is 5.2%. The rates for November of 4.8% or October of 4.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.