TAX UPDATE - A Couple Things to Think About

With the upcoming Presidential election, it’s been fairly quiet with respect to new tax legislation. Here are a couple of things that do deserve our attention.

Tax Free Treatment of Distributions from IRAs-
Federal tax rules now allow anyone age 70-1/2 or older to make qualified charitable distributions from their IRA directly to a charity each year in a tax free transfer to the charity. This distribution can be made from a traditional or a Roth IRA account. The distribution must be made directly from the IRA to the charity. If the distribution is made to the taxpayer and then to the charity, the taxpayer will not qualify for the tax free treatment and will be issued a Form 1099R. You can donate up to $100,000 annually in cash and/or property directly from the IRA account. Distributions from SEP IRAs, Simple plans or qualified plans generally do not apply. An IRA contribution made directly to a charity is considered part of your minimum required IRA distributions or RMDs for the year so if you don’t need the RMD funds this could be a wonderful alternative for you.

The distribution from your IRA to the charity of your choice is free from federal income tax, therefore, you will not have to report that IRA distribution as income. However, the IRA distribution will not qualify for a charitable deduction on your tax return. Keeping your income lower, keeps your adjusted gross income lower which in turn is a marker for various phase outs of itemized deductions, lower net investment income tax of 3.8%, and limits on charitable deductions to name a few. The net effect in most cases is positive and what a wonderful gift you have provided to your favorite charity or charities.

Is your Estate Plan accomplishing what you intend???

No Spousal Rollover for Community Property Interest in IRA-
A recent letter ruling released by the IRS brings to our attention a possible unplanned glitch in estate plans to be aware of. The decedent, who lived in a community property state with his wife, had named his son as the sole beneficiary of his IRAs. After his death, his wife filed a claim against the estate for her community interest in the IRAs, which the state court assigned to her. The IRS declined to determine whether the amount was the spouse’s community property interest, saying that it didn’t matter for federal law as community property was irrelevant. They concluded that since she was not given any beneficial interest, she couldn’t be treated as a payee of her son’s inherited IRAs. In addition, any assignment of the interest in the son’s inherited IRAs to his mother would be treated as a taxable distribution to the son.

If you have any questions about the above, please feel free to contact me.

Have a wonderful Labor Day weekend!!!