The TRA restores a popular charitable giving technique. Under IRC Sec. 408(d)(8), "tax-free distributions from individual retirement accounts (IRAs) can be made for charitable purposes.” The payments must be made directly to a qualified public charity, and not to a donor advised fund or supporting organization. Clients have to be age 70 ½ to qualify. This popular tax benefit was restored for 2010 and permitted for 2011 (not 2012). Because the TRA was enacted so late in the 2010 tax year, taxpayers are granted until the end of January 2011 to make 2010 distributions. Considering the hammering charitable giving has been given by estate tax reductions and lower income tax rates, this is perhaps one of the few bright spots for charities in need. Advisers should caution clients about the state tax effects of this contribution.
The much talked about conversion of an IRA to a Roth IRA might warrant evaluation, in light of the TRA. One of the motivating factors to convert an IRA (to “Roth-it”) was that the income tax paid would be removed from the taxpayer’s estate, thereby reducing his or her estate tax. Well, if the taxpayer considering conversion had an estate of $4 million under prior law the conversion may have been enough to avoid the federal estate tax and even the need to file a return. Under the TRA, with a $5 million exclusion, there would be no federal estate tax benefit to the payment of income tax. Taxpayers in that conversion fact pattern should consider the pros and cons again. Another Roth conversion issue warrants analysis for many estate planning clients. The assumption had been, until nearly the end of 2010, that the anticipated increase in marginal income tax rates would make it worthwhile to elect out of the default income tax treatment for 2010 Roth IRA conversions, which spread the income tax due on the conversion ratably over the 2011 and 2012 tax years. A key advantage to this default tax benefit was that there would be no income taxes due for the 2010 tax year. Instead, many advisers who assumed increasing income tax rates recommended that clients opt out of the default treatment to capture what had been expected to be lower 2010 income tax rates. [Insert sound of a large gong being struck. Remember the Gong Show?]. Now, almost every conceivable scenario, the default spread of income wins out. One possible exception, is if the client had an unusually large deduction to offset (e.g., charitable contribution). AMT planning oddities might present another, but projections of the regular tax and AMT to confirm this would be necessary. Another might be a client who is worried about liability claims and believes it will prove advantageous to simply pay the cash to the IRS.
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