More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
Donating up to $100,000 to charities from IRA accounts was an attractive option for certain investors in 2009, but the rule permitting such qualified charitable distributions (QCDs) expired at the end of 2009, leaving investors to wonder if they would be part of tax legislation in 2010, retroactively. IRA investors must take annual required minimum distributions (RMDs) once they reach 70-1/2 years of age.
While the QCD rule was included, retroactively, in The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, it wasn’t law until President Obama signed the bill Dec. 17. As an article in The Wall Street Journal points out, therein lies the rub: for those who had already taken their RMD for 2010, the IRS says they can’t retroactively back that out and use the QCD to donate that distribution to charity. Those IRA-to-charity contributions can be used to fulfill the RMD for those 70-1/2 or older, and can be beneficial to the investor since they wouldn’t be counted as income.
Unfortunately, this leaves IRA contributors who had charitable intent, but already took their RMD in the lurch, for 2010. Those who waited until 2011 have until the end of January to make a 2010 IRA-to-charity donation, the WSJ article notes.
But here’s the issue: investors who don’t take an RMD, or withdraw less than the “full amount” of the RMD by the IRS deadline, (year-end—with one exception) face a stiff penalty, according to the IRS: “the amount not withdrawn is taxed at 50%.”
So it would appear that only those who used the QDC for their charitable giving between Dec. 17 and year-end, could get the benefit—with one exception: if the investor turned 70-1/2 in 2010 they have until April 1 to take the RMD. Or they have until the end of January to use the 2010 QMD.
IRS spokesman Eric L. Smith provided AdvisorOne.com with this statement on Friday: “Required minimum distributions (RMD) from an IRA received by a taxpayer cannot be rolled over to an IRA. As noted on page 24 of the 2009 IRS Publication 590, Individual Retirement Arrangements, ‘Amounts that must be distributed during a particular year under the required distribution rules are not eligible for rollover treatment.’ Moreover, there's no provision in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act Of 2010, nor any hint in the Committee report for such RMD recontribution.”
There are quite a few opportunities for advisors to help wealthy clients save on taxes in what investment advisor Diahann Lassus, president of Lassus Wherley, called the “Santa Claus” bill.
However, it’s too bad the straight shot from an IRA to charity for the 2010 tax year (fulfilling the required RMD) wasn’t extended as an option to those who had taken the RMD during the first 347 days of 2010, before the new tax law was enacted.
For more on tax planning and estate planning according to the new tax law, please see these AdvisorOne.com articles: