Archive for the ‘IRAs’ Category

Charitable Donations & Planning

Wednesday, December 12th, 2012

Authored By: Jared Ripplinger, CPA, MBA, CFP®. Jared is currently a manager over tax and estate planning work in the Logan office. He works primarily with individuals and small business owners in a variety of industries. Jared is also a member of the board of directors of some of the local non-profit organizations.

With the rapidly approaching end of the year and the holiday season upon us, a lot of individuals assess their charitable giving for the year, and consider making additional charitable contributions before year-end. We will discuss some of the key factors to consider in making charitable gifts:

Qualified Charitable (Non-Profit) Organization:
First of all, it is important to note that only donations made to qualified charitable organizations (under IRC §170). While it may be charitable to donate funds or property to a struggling family member or neighbor, these donations do not qualify for a tax deduction because that person is not a qualified charitable organization under IRC §170.

In general, in order to receive a tax benefit from making charitable contributions, you will need to itemize your deductions on Schedule A. For most types of charitable contributions you are limited to deducting an amount not to exceed 50% of your Adjusted Gross Income (AGI), however certain types of contributions are limited to a lower percentage of AGI . For example, cash contributions made to a private foundation are limited to 30% of AGI. There are some other limitations that may come into effect, as discussed below, under non-cash contributions.

To the extent that a charitable contribution deduction is limited by AGI, the deduction may be carried forward as many as 5 years, or until it is used up in a future year.

In general, the charitable contribution must be made no later than December 31 of the year of contribution. This can be done by writing out a check and dropping it in the mail on or before December 31st, or by delivering the payment to an authorized agent of the charitable or religious organization on or before December 31st. There have also been occasional global disasters, for which congress has granted additional time to make charitable donations beyond year-end (ie: Tsunami in the Pacific, earthquake in Haiti), but those contributions have been few and unanticipated.

Charitable contributions are reported on Schedule A as an itemized deduction. If there is more than $500 in non-cash charitable contributions during the year then Form 8283 must be completed, and additional information is required to be disclosed. For non-cash gifts of greater than $5,000 a qualified appraisal is required, and the qualified appraiser must sign Form 8283, which is then filed as part of the tax return.

An exception to the appraisal requirement is a gift a marketable security. For a marketable security, the average of the high and the low trading price for the security on the date of gift is used as the fair market value of the gift.

Also, depending on the year, taxpayers aged 70½ or older, are allowed to make a direct contribution from an IRA to a qualified charitable organization. This direct IRA transfer is not included in the taxpayer’s taxable income, and the deduction is not allowed for the donation. This is a great tax break for those who are charitably inclined, but who don’t benefit from itemizing their deductions. This direct transfer to charity also counts toward the Required Minimum Distributions (RMD’s) that a taxpayer must begin taking from retirement accounts at age 70½.

A potential benefit for making non-cash contributions of a highly appreciated asset is that the charitable deduction is based on the fair market value on the date of the gift, not on what was originally paid for the asset. The only catch to this is that the deduction is limited to 30% of AGI for most charitable organizations, and 20% of AGI if the gift is to a private foundation.

There are special rules for gifts of motor vehicles. The deduction of a donated vehicle is generally limited to the actual sales proceeds of the vehicle for the charitable organization. However, if the organization uses the vehicle as part of their tax-exempt activities, the deduction will then be the actual fair market value of the vehicle.

Remember, for any type of charitable donation for which you wish to claim a tax deduction, it is crucial that you obtain a receipt from the charitable organization to document the donation. This receipt should be received prior to claiming the deduction on your tax return, otherwise it may be denied by the IRS.

Donated Time and Service:
There is currently no provision for tax deduction of donated time and energy spent for charitable organizations. However, to the extent that you incur expenses directly related to your service for charitable organizations, you may be allowed a deduction for your “volunteer out-of-pocket” expenses. In order to qualify for this deduction you must keep all applicable receipts, and if your total volunteer out-of-pocket expenses exceed $250 during the year, you will need to receive contemporaneous written documentation from the non-profit organization stating what you provided (the type of service) for the organization. For service provided to religious organizations, the letter should state that you received nothing in return for your service other than “intangible religious benefits”.

Other Information of note:
There are special deduction rules for businesses who donate inventory.

There are several funding mechanisms for making charitable donations, including as Donor Advised Funds, Charitable Remainder Trusts, and other tools which can add flexibility to the timing and the amounts involved in the charitable donation process.

The charitable deduction is available to corporations and trusts, with different limitations than individual taxpayers. Also, aside from the income tax side of charitable giving, there is a charitable deduction allowed for charitable bequests made from an estate to qualified charitable organizations.

Charitable giving can be a rich and rewarding experience, and there may be significant tax benefits in doing so. I recommend that you contact your tax advisor for additional details and planning opportunities associated with charitable giving.

What are ERISA Fidelity Bonds?

Wednesday, August 29th, 2012

Authored By: Jessica Haddock, Bookkeeper in Salt Lake office.

The Employee Retirement Income Security Act (ERISA) of 1974, as amended, is a federal statute that establishes guidelines for retirement plans. This statute is jointly overseen by the Department of Labor and the Internal Revenue Service. Section 412 of ERISA requires certain plans to have a fidelity bond that covers all individuals who handle plan assets. The fidelity bond is meant to provide insurance to the plan in the event of fraud or dishonesty by any plan officials who handle plan assets. Individuals that will need to be covered in the bond would be those whose functions involve access to plan funds where the plan assets are at risk of fraud or loss. The Department of Labor suggests that the plan fidelity bond be at least 10 percent of the value of the plan assets, with the maximum fidelity bond being $500,000 unless the plan’s assets are invested in the employer’s securities the bond is then increased to $1,000,000.

Tax-Free distributions from IRAs for charitable purposes Extended with HR4853 extension of Bush Tax cuts

Tuesday, December 21st, 2010

Authored by: Troy Martin, CPA, Shareholder.  Troy specializes in advance tax planning for individuals, businesses, estates, trusts, and pension plans.

With the passage of HR4853 by the House and Senate and the likelihood of President Obama signing the bill into law, an expired provision for taxpayers over 70 1/2 allowing them to pay their required minimum distributions directly to a charity has been extended retroactively for the 2010 tax year.    Under IRC 408(d)(8) a taxpayer can make a contribution to a qualified charity allowable under IRC section 170 in lieu of taking their required minimum distributions.  This allows the taxpayer to avoid including the income from the distribution in adjusted gross income (AGI).  The ability to reduce AGI may reduce the amount of Social Security income that must be taxed therefore saving income taxes on the Social Security benefits received.

The Laws:

Required Minimum Distributions (RMDs):

Annual minimum distribution from traditional IRAs, SIMPLE IRAs, and SEPs must begin by the year the taxpayer reaches 70 1/2.  Taxpayers can choose to delay receipt of the first distribution until April 1st of the year filing the year they turn 701/2.  Thereafter, the RMD for each year must be made by December 31.  If the first distribution is delayed until April 1st of the following year, the second distribution must be made by December 31 of that year. A qualified plan (other than a SEP) account is not subject to the RMD rule until the year the participant retires, even if after age 70 1/2.  However this RMD exception doesn’t apply to participants who are more-than-5% owners of the business sponsoring the qualified plan.

Taxable Social Security Benefits:

A portion of Social Security benefits is taxed if income above a “base amount” which is based on filing status.  If combined income for a single taxpayer is between $25,000 (base amount) and $34,000, up to 50% of benefits are taxable.  If combined income for a single taxpayer is above $34,000, then 85% of benefits are taxable.  If the combined income for married taxpayers is between $32,000 and $44,000, up to 50% of the benefits are taxable.  If combined income for married taxpayers is above $44,000, then 85% of benefits are taxable.

Planning opportunities:

Taxpayers who have reached 70 1/2 can make a distribution of up to $100,000 directly (by the trustee) from their IRA to a charitable organization for tax years ending December 31, 2010, 2011 and 2012.  In addition, taxpayers have until February 1, 2011 to make any distributions to qualified charities and have it count as though it was made on December 31st 2010.  This distribution will count towards the taxpayer’s required minimum distribution if they contribute the amount of the RMD.  For those taxpayers who plan to donate to charities each year can use this technique to lower their AGI to avoid showing income over the Social Security “base amount” therefore avoid paying tax on their Social Security benefits.  If you are 70 1/2 and donate to a charity every year you may want to contact your tax advisor to see if using this strategy may help you avoid paying taxes on your Social Security Benefits.

2010 Roth IRA Conversions

Wednesday, February 10th, 2010

In a prior blog post ROTH vs. Traditional IRA David Cash explained the difference between Traditional IRAs and Roths but this post will focus on the new conversion rules.

Starting in 2010 high income individuals can now convert their traditional IRAs to a Roth IRA. Prior to 2010 individuals with AGI over $100,000 could not convert traditional IRAs to a Roth IRA but could directly transfer from a Roth 401(k) to a Roth IRA. If a taxpayer converts their traditional IRA to a Roth they will have the choice to either pay the tax in 2010 or delay the tax to 2011 and 2012 but cannot do both.

The default tax treatment will defer paying the tax to 2011 and 2012 so for example if the taxpayer wishes to convert $100,000 in 2010 the taxpayer will pay tax on $50,000 in 2011 and $50,000. If the taxpayer wishes to pay the tax in 2010 the taxpayer will have to make an election to have the entire distribution taxed in 2010.

(Planning Note) It will be an advantage to convert now and push the tax to future periods if you can reasonably project your income to determine the appropriate amount to convert. In addition, many believe that since their investments may have suffered a decline in prior periods, now would be the time to get the funds growing. One issue that may not be obvious is that the election to pay the tax in 2010 is an all or none election so if the taxpayers wishes to convert and pay tax on the conversion in 2010 plus pay on an amount in 2011 and 2012 they will not be able to do so. However, if the taxpayer’s spouse has a traditional IRA they will be able to make their own election and pay the tax in 2010.

(Real life example) A client called and asked if it would be a good time to convert. Prior to 2010 the client’s income was over $100,000 and could not convert. The client also recently donated a conservation easement and would be entitled to a large charitable deduction. The client is concerned that he will not be able to use the charitable deduction within the 5 year carry forward period before it expires. A charitable deduction for an easement is limited to 50% of AGI so the utilization of the deduction is based on the taxpayers AGI. I determined that the client could contribute $40,000 in 2010 and $57,000 in 2011 and $57,000 2012 for a total conversion $154,000 in 2010. This allows the client to have the future value growth in the Roth IRA. The client wanted to convert as much as possible while still staying in the 15% federal tax bracket and wanted to make the conversion as soon as possible. However, the law prohibits the client from making a conversion in 2010 if he wanted to pay tax on the conversion in 2011 and 2012. Luckily the taxpayers spouse also had a traditional IRA and was able to make the conversion on the $40,000 in 2010. The taxpayer’s spouse will have to make an election to pay the tax on the conversion in 2010.

There are many reasons to convert a traditional IRA to a Roth, but, with most tax planning decisions it is critical to enlist the advice of a professional before executing any tax strategy. Please feel free to contact any of the accountants at Cook Martin Poulson, PC to discuss how this strategy would affect you.

Authored by Troy R. Martin, CPA, Shareholder of Cook Martin Poulson.




ROTH vs. Traditional IRA

Saturday, January 30th, 2010

Authored by David Cash, CPA, MAcc. Dave has worked in both offices of CMP. He spent 2 years in the Logan office and has been in the Salt Lake office for 3 years. Dave specializes in oil and gas taxation, and individual and business tax planning and compliance.

When a taxpayer is not offered a retirement plan through their work place many taxpayers that still want to save for retirement are faced with one major decision…what type of IRA do I want?

As with most questions in the world of taxation, this is a question that can only be answered by “It depends.”

It depends on the personal situation of the taxpayer and what expectations they have for the future. Let’s start with the major difference between these two types of IRA:

A ROTH IRA is one where the contributions are taxed, but the earnings can be tax free.

A Traditional IRA is one where the contributions are deductible, but when the money is distributed from the IRA then the entire distribution is taxable.

Taxpayers that would be ideal to chose the ROTH IRA would be someone:

  1. That is younger (more years for earnings to grow in the IRA),
  2. That may need to use the contributions prior to age 59 ½ (contributions can be withdrawn tax free prior to age 59 ½)
  3. In a low tax bracket (a bet that they will be in a higher tax bracket when they withdraw the money tax free), or
  4. Someone that doesn’t expect to need the money in retirement (maybe you will get a big inheritance and you want your savings to go to your heirs and you don’t want to have Required Minimum Distributions).

Taxpayers that would be ideal to chose the Traditional IRA would be someone

  1. That is in a higher tax bracket (needs or wants the tax deduction now),
  2. Someone that actually wants to save the money for retirement (most distributions prior to age 59 ½ are subject to a 10% early withdrawal penalty)
  3. Someone whose income exceeds the limit to be allowed to contribute to a ROTH IRA (for 2010 people who file Married Filing Joint can’t contribute to a ROTH if their Modified Adjusted Gross Income is over $177,000), or
  4. Someone who expects their tax bracket to be lower when they retire (you don’t want to pay tax at 35% when you may be able to pay tax at 10% when you retire).

There are many aspects to consider when deciding what type of IRA is best for you. The biggest reason why most accounting questions, including this one, are answered with “It depends” is that what may be best for you may not be best for your next door neighbor. People and situations are different and in the world of retirement contribution options one size does not fit all.


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