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Recent Commentary

Visual Planned Giving - Chapter 15 - Donating Retirement Assets

Wednesday, February 21, 2018

In the fifteenth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James explains how retirement accounts and charitable giving are logical bedfellows. Retirement accounts consist of more than one-third of household financial assets. Thus, they represent a significant source of charitable gifts.

Retirement accounts have three stages. Early distributions, which occur before age 59 ½, are subject to a 10% penalty. At age 59 ½, these penalties no longer apply, but the donor must pay taxes on the distributions. Stage two begins at age 70 ½, when donors must take at least a minimum distribution each year, or pay penalties. Ideally, a donor age 70 ½ or older who does not need the income, and would like to make a gift to charity, would simply make a "qualified charitable distribution." With this technique, the donor does not receive a charitable income tax deduction, but the distribution is not included in gross income, and the amount gifted to charity reduces the required minimum distribution. This is preferable to a withdrawal and corresponding gift, which may not provide a perfect offset due to income limitations on charitable gifts. Stage three occurs at death. While gifting from retirement accounts during life can have negative consequences, making gifts of retirement assets at death almost always proves beneficial. Because retirement assets are subject to gift, estate, generation-skipping and income taxes at death, the value transferred to beneficiaries is almost always significantly less than face value. Exempt organizations do not pay these taxes, and so donors who wish to benefit charity posthumously, should give retirement assets. We should note the participant's spouse must approve the beneficiary designation with ERISA retirement accounts, but not with a traditional or Roth IRA.

Retirement planning and charitable planning can also coincide through the conversion of a traditional IRA to a Roth. In both vehicles, assets grow tax free, but unlike a traditional IRA, no taxes are owed on distributions from a Roth, because contributions are made with after-tax dollars. Conversion to a Roth IRA results in income taxes on the amount of the conversion, less any basis in the traditional IRA. This generates an immediate spike in taxable income, which can be offset through a charitable gift. Thus, a donor who is planning a Roth conversion could have heightened interest in utilizing a planned giving strategy such as a CRT, CGA, pooled income fund, or remainder deed. Additionally, a donor who generated a large deduction through one of these tactics, and has unused deductions, can "pull" income into the current year with a Roth conversion, and utilize the deduction before it expires.

Given the amount of household wealth invested in retirement accounts, charitable planning with them should not be overlooked. A basic understanding of this area will help donors avoid potentially disastrous mistakes, and enjoy favorable tax consequences.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 15 and the entire book.

TIGTA's Latest Audit Highlights Major IRS Errors

Tuesday, February 20, 2018
IRS

TIGTA assessed the Service's process to notify employment identity theft victims and conducted a follow up review of a prior TIGTA report regarding the Service's award program, concluding IRS failed to perform on these issues. The Chairmen of the House Ways and Means Committee and Senate Finance Committee also commented on IRS failures.

March 2018 Rate Continues the Climb to 3.0%

Monday, February 19, 2018
Rates / Tables / Statistics

In Rev. Rul. 2018-6, the Service announced the Section 7520 rate for March will increase to 3.0%, the highest rate since May 2011. Last month's 7520 rate was 2.8%, the highest since June 2011.

IRS Updates Applicable Federal Rates for March 2018

Friday, February 16, 2018
Rates / Tables / Statistics

The IRS has announced the Applicable Federal Rates for March 2018, including the Section 7520 rate of 3.0%.