Comments Off

By Editor, May 4, 2011

IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make cash donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no itemized charitable write-off on Form 1040. That’s OK because the tax-free treatment of QCDs equates to an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages too. Here is what you need to know.

QCD Basics

A QCD is a cash payment of an otherwise taxable distribution, by your IRA trustee, directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity.

You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. If you are the beneficiary of an IRA (as opposed to an account owner), you too are eligible for the QCD deal if you are at least age 70 1/2.

You must get and keep substantiation of the contribution from the charity. Also, you must not have received any benefit in return for making the contribution.

The QCD privilege is scheduled to expire at the end of this year, so if you want to take advantage of the idea, it is not too soon to start thinking about it.

Income Tax Benefits

QCDs are not included in your Adjusted Gross Income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based phase-out rules. In addition, you don’t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities.

QCDs count as a payouts for purposes of the Required Minimum Distribution (RMD) rules. Therefore, you can donate all or part of your 2011 RMD amount (up to the $100,000 limit on QCDs) and thereby convert taxable RMDs into tax-free QCDs.

Does the QCD Deal Work for You?

The QCD privilege is beneficial for seniors in the following circumstances:

• You don’t itemize deductions. Under the “normal” rules, only itemizers get any income tax benefit from charitable donations. Making QCDs will save taxes whether you itemize or not because neither you nor your heirs will ever have to pay income taxes on the donated amounts.
• Your itemized charitable donations would be delayed by the 50%-of-AGI limitation. Making QCDs will avoid this unfavorable limitation.
• You want to avoid being taxed on RMDs that you are forced to take from your IRAs. The QCD strategy does the trick while also allowing you to satisfy your charitable inclinations.

Conclusion

If you’re interested in taking advantage of the tax-saving QCD strategy for 2011, you will need to arrange with your IRA trustee for money to be paid out to one or more qualifying charities by year-end.

If you have questions about QCDs or want more information, your Wilson Price accountant.

Comments Off

By Editor, January 6, 2011

Background

Before 2010, there was an often-unavoidable stumbling block for higher-income individuals who wanted to implement the Roth IRA conversion strategy. In those years, conversions were prohibited for folks with Modified Adjusted Gross Income (MAGI) in excess of $100,000. For 2010 and beyond, the MAGI restriction is history. The rule that made individuals who use married filing separate status ineligible for Roth IRA conversions is also history for 2010 and beyond. Thanks to the demise of these restrictions, 2010 was “the year of the Roth IRA conversion”. For taxpayers that made the conversion, the story is not over. In fact, 2011 is when the rubber meets the road for 2010 conversions.

2010 Converters Must Decide When Conversion Income Will Be Recognized

2010 converters can spread the taxable income triggered by 2010 conversions evenly over 2011 and 2012 (50% in each year) for federal income tax purposes and thereby defer the tax hit. In fact, this defer-and-spread deal happens automatically unless the taxpayer makes the alternative election to recognize all the conversion income in 2010. [See IRC Sec. 408A(d)(3)(A)(iii) .]

Going with the defer-and-spread deal is not a no-brainer. For example, if you believe you will pay a lower marginal tax rate in 2010, it might make sense to recognize all the conversion income in 2010 by reporting it on that year’s Form 1040. As we just explained, making that choice will require an election with the 2010 return.  As this was written, we did not have any details about how to make the election. We will tell you as soon as we know more.

No general rule of thumb can be offered for whether to recognize the income for 2010, or spread it over 2011 and 2012. Each taxpayer’s situation must be considered individually.

2010 Converters Have until 10/17/11 to Reverse Ill-fated Conversions

Another “safety valve” for Roth IRA conversions is the fact that converters are allowed to change their minds well after doing the deed. Any 2010 converter has until the extended due date for filing his 2010 Form 1040 to recharacterize the converted amount back to traditional IRA status. The extended due date for 2010 returns is 10/17/11 (for calendar-year taxpayers). A recharacterization reverses the earlier conversion and eliminates the related tax liability. The 10/17/11 deadline for reversing 2010 conversions applies whether or not the converter actually extends his 2010 Form 1040. [See IRC Sec. 408A(d)(6) and (7) and Reg. 301.9100-2(b) .]

Example: Fred converted two traditional IRAs into two Roth IRAs in 2010. In 2011, the values of the converted accounts plummet due to poor investment performance. In this bleak scenario, Fred would have to pay income tax on value that later disappeared. Bad idea! Thankfully, he has until 10/17/11 to reverse the 2010 conversions by recharacterizing the two Roth IRAs back to traditional IRA status. After the reversal, it’s as if the ill-fated conversions never happened. So, Fred won’t owe any tax on the now-reversed conversions.

Side Note: Regardless of whether taxpayers are 2010 converters, doing any 2011 conversions early in the year makes some sense because clients will have until 10/15/12 to reverse any ill-fated 2011 conversions. That’s almost two years to see how things go. Of course, if 2010 converters also do 2011 conversions, it puts extra variables in play regarding the best time to recognize income from the 2010 conversions.

Why 2010 Converters Should Extend Their Returns

There are two big reasons for 2010 converters to extend their 2010 returns to 10/17/11.

• First, it creates extra time for converters to decide if they are better served by: (1) going with the defer-and-spread deal that results in spreading the conversion income evenly between 2011 and 2012, or (2) making the election to report all the conversion income in 2010. Converters should have a better handle by next October on how much income they expect to have in 2011 and 2012. We hope and trust that the IRS will provide timely guidance not only on how to make this election, but also allowing it to be made on a timely filed extended return.
• Second, extending their 2010 returns will make it much easier for converters to handle any reversals of 2010 conversions. If the converter’s return is extended, the reversal is reported by simply showing no income from the now-reversed conversion on the original 2010 Form 1040. Simple! If the 2010 return is not extended and a 2010 conversion is reversed after the filing date, an amended 2010 return will have to be filed to report the reversal. Not so simple!

Conclusions

Doing Roth IRA conversions in 2010 made lots of sense for certain taxpayers, but the book is still open because decisions about 2010 conversions must be made in 2011. First and foremost, 2010 converters should consider to extending their returns to create extra time to make those decisions.

Comments Off

By Editor, October 30, 2009

Jennifer Burton is an accountant with Warren Averett Wilson Price Division and has more than 10 years of experience in the Estate and Trust department with fiduciary accounting and taxation, estate and gift planning and taxation, individual income tax planning and preparation.  She is active in her community in Tallapoosa County and serves as Chairperson of the Finance Committee for New Prospect United Methodist Church.

Email
Phone: 334-260-2396