The IRS issued final and proposed rules governing required minimum distributions (RMDs) under Code Sec. 401(a)(9). The regulations reflect changes made by the SECURE Act (P.L. 116-94) and SECURE 2.0 Act (P.L. 117-328) that apply to qualified plans and IRAs. The final regulations apply for distribution calendar years beginning on or after January 1, 2025. The IRS simultaneously proposed further changes to reflect certain provisions of the SECURE 2.0 Act.

The IRS issued final and proposed rules governing required minimum distributions (RMDs) under Code Sec. 401(a)(9). The regulations reflect changes made by the SECURE Act (P.L. 116-94) and SECURE 2.0 Act (P.L. 117-328) that apply to qualified plans and IRAs. The final regulations apply for distribution calendar years beginning on or after January 1, 2025. The IRS simultaneously proposed further changes to reflect certain provisions of the SECURE 2.0 Act.

Final Regulations

The final regulations reflect the SECURE Act’s increase in the applicable age for beginning RMDs and the limitation on lifetime distributions to beneficiaries under defined contribution plans. With respect to lifetime distributions under Code Sec. 401(a)(9)(H), the final regulations provide that the 10-year rule applies to designated beneficiaries that die on or after the January 1, 2020, statutory effective date. The regulations provide additional details on the definition of eligible designated beneficiaries.

The IRS retained the controversial rule in the proposed regulations that requires continued annual distributions to a designated beneficiary under the 10-year rule. Thus, when an employee or IRA owner dies on or after their required beginning date and their beneficiary follows the 10-year distribution rule, the beneficiary must continue to take annual distributions until the end of the 10-year period, when full distribution is required. This rule also applies after the death of an eligible designated beneficiary taking life expectancy payments and a minor child beneficiary’s attainment of the age of majority. However, the IRS noted that transition relief applies through 2024.

The final regulations also provide rules for treating trusts as beneficiary, in particular, rules for see-through trusts and trusts with multiple beneficiaries. The final regulations include a special rule that prevents a surviving spouse from using the 10-year rule to delay the commencement of benefits beyond the decedent’s required beginning date.

Proposed Regulations

The IRS reserved some provisions of the final regulations that reflect changes made under the SECURE 2.0 Act. For example, the statute is unclear as to whether the applicable age for employees born in 1959 is 73 or 75. The proposed regulations would provide that 73 is the applicable age for beginning RMDs.

In addition, the IRS is seeking comments on the following:

• Rules of operation for aggregating the purchase of an annuity contract with a portion of the employee’s individual account.
• Whether distributions from a designated Roth account should be disregarded for purposes of satisfying RMD rules, so that it might be rolled over to a Roth IRA.
• Whether a RMD must be made in a year in which a corrective distribution for a previous year is made.
• How to make a spousal election to be treated as the employee for purposes of calculating the RMD.
• How divorce affects the purchase of qualifying longevity annuity contract (QLAC).

Effective Dates

The final regulations apply for distribution calendar years beginning on or after January 1, 2025. For earlier distribution calendar years, taxpayers must apply prior regulations plus a reasonable good faith interpretations of statutory amendments made by the SECURE Act and (for 2023 and 2024 distribution calendar years) the SECURE 2.0 Act.

The proposed regulations would have the same applicability dates as the corresponding provisions in the final regulations.

Department of the Treasury Secretary Janet Yellen said there are no plans to extend the Beneficial Ownership Information reporting deadline.

Department of the Treasury Secretary Janet Yellen said there are no plans to extend the Beneficial Ownership Information reporting deadline.

"I don't think it's going to be necessary to extend the timeframe," she testified during a July 9, 2024, House Financial Services Committee hearing, highlighting ongoing outreach and what the agency considers a good amount of reporting so far.

During the hearing, a number of committee members noted that there are still a lot of small business owners who do not know that they have this BOI reporting requirement from the Financial Crimes Enforcement Network and could be facing significant financial penalties that might create a financial hardship if they miss the deadline to report BOI by the end of the year.

However, Secretary Yellen does not expect this to be an issue, relying on specific wording of the reporting regulations that will help small business owners who may not be aware they have to file that could protect from the $250,000 fine associated with not filing a BOI report.

"The fine is for a ‘willful’ violation," she said, although when pressed, she could not provide a clear definition of what constitutes a willful violation. Yellen added that "FinCEN is not going to prioritize going after small businesses."

She also noted that FinCEN is engaged in extensive and ongoing outreach to make sure small business owners are aware of and educated on the requirement to file a BOI report.

By Gregory Twachtman, Washington News Editor

Compliance initiatives using supplemental Inflation Reduction Act funding have resulted in the Internal Revenue Service collecting more than $1 billion from millionaires, the agency stated.

Compliance initiatives using supplemental Inflation Reduction Act funding have resulted in the Internal Revenue Service collecting more than $1 billion from millionaires, the agency stated.

In a July 11, 2024, statement, the IRS noted that the collection of these past-due taxes is the result of targeting 1,600 individuals with more than $1 million per year in income and a past due balance of more than $250,000 in recognized debt.

The IRS assigned 1,500 revenue officers to these cases. They were able to collect the more than $1 billion in past due payments from more than 1,200 individuals. The agency expects more money to be collected from this group in the months ahead as the compliance initiative in this area continues.

"Our increased work in this area means these past-due tax bills from high-end taxpayers are no longer being left on the table, like they were too often in the past," IRS Commissioner Daniel Werfel said in a statement.

Werfel added that the supplemental funding the agency received in the IRA "is reversing a decade-long decline in our compliance work, including increasing our compliance work involving the wealthiest individuals and groups with tax issues. The collection results achieved in less than a year reveal the magnitude of what can be achieved over the long run as our Inflation Reduction enforcement continues to ramp up in the months ahead."

The Treasury Department and IRS have issued regulations requiring brokers of digital assets to report certain sales and exchanges. The regulations address the reporting requirements enacted by the Infrastructure Investment and Jobs Act (P.L. 117-58 ). According to the IRS, the regulations should improve the deter noncompliance through sales and exchanges of digital assets.

The Treasury Department and IRS have issued regulations requiring brokers of digital assets to report certain sales and exchanges. The regulations address the reporting requirements enacted by the Infrastructure Investment and Jobs Act (P.L. 117-58). According to the IRS, the regulations should improve the deter noncompliance through sales and exchanges of digital assets. In addition, the reporting requirements will provide taxpayers with the information needed to accurately report their digital asset activity. The regulations are part of the larger effort to ensure tax compliance from high-income individuals.

In addition to the broker reporting rules, the regulations establish the requirements for taxpayers to determine their basis, gain, and loss from digital asset transactions. The regulations also create backup withholding rules.

Reporting Requirements

Under the final regulations brokers must report the gross proceeds for sales or exchanges of digital assets taking place on or after January 1, 2025, on a new Form 1099-DA. In addition, the regulations require brokers to furnish their customers with payee statements. Beginning in 2026, brokers will also be required to include gain or loss and basis information for certain sales on these information returns and statements.

Real Estate Reporting

Under the final regulations, real estate reporting persons treated as brokers with respect to reportable real estate transactions would also be required to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate in transactions that close on or after January 1, 2026.

These real estate reporting persons would also be required to include the fair market value of digital assets paid to sellers of real estate in certain real estate transactions on Form 1099-S.

Brokers Impacted by the Regulations

These final regulations apply only to digital asset industry participants that take possession of the digital assets being sold by their customers, such as operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, certain PDAPs, and digital asset kiosks, as well as to certain real estate reporting persons that are already subject to the broker reporting rules. Brokers that do not take possession of the digital assets being sold or exchanged, often referred to as decentralized or non-custodial brokers, are not subject to the new reporting requirements. The IRS will provide rules for these brokers in separate regulations.

The definitions of a processor of digital asset payments (PDAP) and PDAP sales applies only to transactions in which PDAPs take possession of the digital asset payment. The requirement that a person must receive the digital assets in order to be a PDAP covers all transactions. Proposed new digital asset middleman rules that apply to non-custodial industry participants were not finalized. The IRS continue to study this area. However, the acceptance of digital assets in return for cash, stored-value cards, or different digital assets by a physical electronic terminal or kiosk is identified as a facilitative service.

The final regulations include a rule allowing taxpayers to use a standing order or instruction to make adequate identifications of digital assets. A broker may also take into account customer provided acquisition information for purposes of identifying which units are sold, disposed of, or transferred under the identification rules. A new rule accommodates the unlikely circumstance in which the broker does not have any transfer-in date information about the units in the broker’s custody.

Stablecoins and NFTs

Stablecoins pegged to a fiat currency are not excluded from the definition of "digital assets." The IRS will take into account any subsequent legislation regarding stablecoins. The final regs provide an alternative reporting method for certain stablecoin transactions. The final regs also provide an alternative reporting method for certain types of nonfungible tokens (NFTs). For PDAP transactions, the regulations require reporting on a transactional basis only if the customer’s sales are above a de minimis threshold.

The IRS concluded that optional approaches to reporting dual classification assets generally are not appropriate, but special rules may apply to tokenized securities (which do not include stablecoins). Exceptions also apply to apply to dual classification assets that are cleared or settled on a limited-access regulated network, are section 1256 contracts, or are shares in money market funds. Additional special rules apply when a dual classification asset is a digital asset solely because its sale is cleared or settled on a limited-access regulated network.

Delay on Information Reporting for Certain Transactions

Under Notice 2024-57, until the IRS issues further guidance, brokers will not have to file information returns or furnish payee statements on digital asset sales and exchanges for the following six types of transactions:

• Wrapping and unwrapping transactions,
• Liquidity provider transactions,
• Staking transactions,
• Transactions described by digital asset market participants as lending of digital assets,
• Transactions described by digital asset market participants as short sales of digital assets, and
• Notional principal contract transactions.

Transitional Relief

The IRS has provided general transitional relief in Notice 2024-56. Any broker who does not timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during calendar year 2025, will not be subject to reporting penalties and backup withholding, provided that the broker makes a good faith effort to comply with the reporting obligations. In addition, more limited relief is provided from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs. Finally, the Notice provides backup withholding relief for exchanges of digital assets in return for specified NFTs and real property and for certain sales effected by PDAPs.

The IRS released final regulations relating to the excise tax imposed on certain sales by manufacturers, producers, or importers of designated drugs. 

The IRS released final regulations relating to the excise tax imposed on certain sales by manufacturers, producers, or importers of designated drugs. Specifically, the final regulations set forth procedural provisions relating to how taxpayers must report liability for such tax. The final regulations also except such tax from semimonthly deposit requirements. The final regulations affect manufacturers, producers, or importers of designated drugs dispensed, furnished, or administered to individuals under the terms of Medicare during certain statutory periods. The proposed regulations (NPRM REG-115559-23) were published on October 2, 2023. After consideration of the public comments, the regulations finalized by the IRS adopt the proposed regulations with three non-substantive modifications. Specifically, the final regulations modify proposed §§40.0-1, 40.6011-1(d), and 40.6302(c)-1 by clarifying that the Code Sec. 5000D tax is imposed on “the sale of” designated drugs. The language, as modified, more closely tracks the language of Code Sec. 5000D(a).

Applicability Dates

The final regulations, which are effective on August 16, 2024, generally apply to calendar quarters beginning on or after October 1, 2023. For rules that apply before October 1, 2023, see 26 CFR part 40, revised as of April 1, 2024.

The IRS warned taxpayers about misleading claims regarding a fictitious "Self Employment Tax Credit." Promoters and social media posts are inaccurately suggesting self-employed individuals and gig workers can claim substantial payments for the COVID-19 pandemic period. These claims are not valid, and taxpayers were advised to consult trusted tax professionals before filing such claims.

The IRS warned taxpayers about misleading claims regarding a fictitious "Self Employment Tax Credit." Promoters and social media posts are inaccurately suggesting self-employed individuals and gig workers can claim substantial payments for the COVID-19 pandemic period. These claims are not valid, and taxpayers were advised to consult trusted tax professionals before filing such claims.

Promoters are falsely marketing a"Self Employment Tax Credit," similar to incorrect promotions about the Employee Retention Credit. The actual credit being misrepresented is the Credits for Sick Leave and Family Leave, which is highly specific and only applicable under certain conditions in 2020 and 2021. Taxpayers filing claims based on misleading information risk submitting incorrect returns, as these credits are not available for 2023 tax returns. The IRS is scrutinizing such claims, and inaccurate filings can lead to complications.

IRS Commissioner Danny Werfel emphasized the danger of such misleading information, urging taxpayers to avoid outlandish claims from social media and marketers. Claims should be verified by consulting a reliable tax professional. The IRS highlighted that many self-employed individuals wrongly use Form 7202, leading to inappropriate claims. The IRS continues to see a pattern of incorrect claims fueled by social media, advising taxpayers to be vigilant and seek professional advice before filing.

The Internal Revenue Service needs to do more in underserved markets, according to a recent report from the Treasury Inspector General for Tax Administration.

The Internal Revenue Service needs to do more in underserved markets, according to a recent report from the Treasury Inspector General for Tax Administration.

"The IRS has made improvements to increase the accessibility and availability of customer service in underserved, underrepresented, and rural communities; however additional efforts are needed to improve the geographic outreach efforts in these communities," a June 25, 2024, report states.

One of the problems identified in the report is that while there are various models that the agency uses to identify these populations, "there is no clear definition for these populations. Without a clear definition of what constitutes these populations, the IRS is unable to measure its progress in increasing accessibility and availability to these segments of taxpayers."

The agency watchdog noted that not having a clear definition "presents a risk that the IRS will not meet the objectives of the SOP [Strategic Operating Plan] and as such, will not provide additional service where it is needed and to whom needs it."

TIGTA also reported that the IRS’s data for determining locations to set up Taxpayer Assistance Centers is out of date and causing the agency to not reach these underserved populations. The agency is currently using demographic data from 2016 to identify the availability of TACs but, as TIGTA reports, citing U.S. Census Bureau data, "approximately 8.2 million people moved to different states in 2022. Considering the IRS is using data over six years old, the information is most likely outdated and therefore, the IRS may be incorrectly identifying where underserved and underrepresented populations are located."

TIGTA also called for a more comprehensive communications strategy to reach these populations.

"[W]e identified that additional efforts are needed to market these efforts to increase taxpayer education and awareness as to these eligible services," including TACs, Volunteer Income Tax Assistance, Low-Income Taxpayer Clinics, and Taxpayer Counseling for the Elderly, the report stated.

For example, IRS management stated that some events in rural communities had low attendance, with IRS management noting that the agency "relies on the local contact personnel within each community to help spread the word about these types of events," TIGTA reported. "Intentional planning and focused marketing strategies could increase taxpayer participation."

TIGTA made a number of recommendations with it said the IRS agreed with.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service has room to improve its virtual currency tax compliance enforcement, according to the Treasury Inspector General for Tax Administration.

The Internal Revenue Service has room to improve its virtual currency tax compliance enforcement, according to the Treasury Inspector General for Tax Administration.

In a report dated July 10, 2024, the treasury watchdog noted that the IRS has established a partnership"between the criminal and civil functions to identify taxpayers who omit digital assets for their tax returns. However, [the partnership’s] primary purpose has been limited to the acquisition of tools and training, rather than pursuing taxpayers."

In addition, TIGTA reported that the current timeline for enforcement activities "will hinder efforts to regulate the digital asset industry and may result in lost revenue and taxpayer burden."

The Infrastructure and Jobs Act of 2021 requires brokers to file an information return for digital transactions in a calendar year. The IRS has created an information form to report information needed to calculate gains and losses of digital currency transactions, but those regulations are not effective until January 1, 2025, for gross proceeds reporting and January 1, 2026, for basis reporting.

Criminal enforcement has increased over time related to digital assets. Between fiscal year 2018 and fiscal year 2023, Criminal Investigations saw a 113 percent increase in cases with digital assets, TIGTA reported. In that time, digital asset seizure values have increased, with a highest amount of $7 billion in FY 2022. In that same window, cases recommended for prosecution has more than doubled.

Despite the increases, TIGTA notes that the "anonymity of virtual currency complicates the IRS’s enforcement efforts," adding that there are challenges because the agency "does not have a clear window into taxpayers’ virtual currency investments or transactions because their names are generally not directly attached."

Also, the IRS "does not consistently get reports from trading platforms on virtual currency transactions."

TIGTA asserted that more needs to be done noting that with the limited reporting requirements and the anonymity of virtual currency and the associated transactions "has emboldened taxpayers to move money offshore, purchase illegal goods and services, and carry out other nefarious activities. Users may feel there is the possibility of avoiding tax obligations."

By Gregory Twachtman, Washington News Editor.

The IRS recently announced that inflation is increasing many dollar amounts in the Tax Code for 2012.  For taxpayers, the inflation adjustments may help reduce their overall tax liability in 2012.

Inflation adjustments

Many provisions in the Tax Code are required to be adjusted annually for inflation. These include various deductions, exemptions and exclusion amounts.  The tax law also requires that the individual income tax brackets be adjusted annually for inflation.  Low inflation in 2009 and 2010 resulted in many of the provisions experiencing no increases for 2010 and 2011.

Next year is different. In October, the IRS announced that inflation is running at just over 3.8 percent. In response, the IRS adjusted a number of amounts in the Tax Code upward for 2012.

Retirement accounts

401(k) plans. For 2012, the maximum amount an individual can contribute tax-free to a 401(k) plan increases $500 from $16,500 to $17,000.  However, some 401(k) plans limit maximum contributions to levels below the ceiling in the Tax Code.

IRAs. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of households who are covered by a workplace retirement plan and whose modified adjusted gross incomes fall within certain ranges. For 2012, the income phaseout range starts at $58,000 and ends at $68,000, up from $56,000 and $66,000, respectively, for 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range for 2012 starts at $92,000 and ends at $112,000, up from $90,000 and $110,000, respectively, for 2011.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out for 2012 if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000, respectively, for 2011.

Roth IRAs are subject to similar rules. The AGI limit for maximum Roth IRA contributions for a married couple filing a joint return for 2012 is $173,000, an increase of $4,000 from 2011. The AGI limitation for all other taxpayers (other than married taxpayers filing separate returns) increases from $107,000 for 2011 to $110,000 for 2012.

Saver’s credit.  The Code Sec. 25B credit rewards eligible individuals with a tax credit for contributing to a retirement plan or an IRA.  For 2012, the AGI limit for the “saver’s credit” increases for single individuals to $28,750, an increase of $500 from 2011. The AGI limit for married couples filing joint returns increases from $56,500 for 2011 to $57,500 for 2012.

Individual income tax brackets

Inflation also impacts the individual income tax rate brackets (which are 10, 15, 25, 28, 33, and 35 percent, respectively, for 2011 and 2012).  Indexing of the income tax rate brackets effectively lowers tax bills by including more of an individual’s income in lower brackets.

More inflation adjustments

Standard deduction. Taxpayers who elect not to itemize deductions use the standard deduction amount. The standard deduction increases by $500 for married couples filing a joint return from $11,400 for 2011 to $11,900 for 2012.   The standard deduction for single individuals increases from $5,700 for 2011 to $5,950 for 2012.

Personal exemption.  Taxpayers may claim a personal exemption deduction (and an exemption deduction for each person they claim as a dependent). The amount of the personal exemption and the dependency exemption increases from $3,700 for 2011 to $3,800 for 2012.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) repealed the personal exemption phaseout for higher income taxpayers for 2011 and 2012.

Estate tax.  The 2010 Tax Relief Act provided that the basic exclusion amount for determining the amount of the unified credit against estate tax for estates of decedents dying after December 31, 2009 is $5 million. The $5 million amount is adjusted for inflation for tax years beginning after December 31, 2011. For 2012, the inflation-adjusted amount is $5,120,000.

Gift tax exclusion.  For 2012, you can give up to $13,000 to any person without incurring gift tax. Married couples can gift up to $26,000 tax-free to any person. There is no limit on the number of individuals you can make the $13,000 ($26,000) gift. The $13,000 and $26,000 amounts are unchanged from 2011.

If you have any questions about these or other inflation adjustments, please contact our office.

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program.  It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.

The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.

If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.

“All the facts and circumstances”

The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.

Examples of behavioral and financial factors that tend to indicate a worker is an employee include:

• The worker is required to comply with instructions about when, where, and how to work;
• The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
• The worker’s hours are set by the employer;
• The worker must submit regular oral or written reports to the employer;
• The worker is paid by the hour, week, or month;
• The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
• The worker has the right to end the employment relationship at any time without incurring liability.

In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.

Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.

Conclusion

Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.

Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.

Charitable contributions traditionally peak at the end of the year-end. While tax savings may not be your prime motivator for making a gift to charity, your donation could help your tax bottom-line for 2015. As with many tax incentives, the rules for tax-deductible charitable contributions are complex, especially the rules for substantiating your donation. Also important to keep in mind are some enhanced charitable giving incentives scheduled to expire at the end of 2015.

Year-end charitable giving can benefit your 2015 tax bottom-line

Charitable contributions traditionally peak at the end of the year-end. While tax savings may not be your prime motivator for making a gift to charity, your donation could help your tax bottom-line for 2015. As with many tax incentives, the rules for tax-deductible charitable contributions are complex, especially the rules for substantiating your donation. Also important to keep in mind are some enhanced charitable giving incentives scheduled to expire at the end of 2015.

Tips

The IRS has posted tips for deducting charitable contributions on its website. The tips are a good refresher of the fundamental rules for deducting charitable contributions:

• To be tax-deductible, a contribution must be made to a qualified organization.
• To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.
• If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
• Donations of clothing and household items must generally be in good used condition or better to be tax-deductible.
• Special rules apply to donations of motor vehicles.
• Many donations must be substantiated; the substantiation rules vary for different donations.

Qualified organizations

Some individuals are surprised to learn that their donation is not tax-deductible because the recipient is not a qualified charitable organization. Generally, churches, temples, synagogues, mosques, and other religious organizations are qualified charitable organizations. Nonprofit community service, educational, and health organizations are also generally qualified charitable organizations. Special rules apply to foreign charities. If you have any questions whether the organization is a qualified charitable organization, please contact our office.

Substantiation rules

Unless a charitable contribution is properly substantiated, the IRS may deny your deduction.

Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. Remember, this rule applies to all cash contributions, even contributions of small monetary amounts. The IRS will not accept certain personal records. For example, you cannot substantiate a contribution by reference to a diary or notes made at the time of the donation.

In recent years, text message donations have grown in popularity. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.

To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.

One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.

Additional rules apply for donations valued at more than $5,000. These donations generally require an appraisal and you must advise the IRS of that appraisal by filing a special form.

Expiring provisions

Under current law, certain IRA owners can directly transfer tax-free, up to $100,000 annually from the IRA to a qualified charitable organization. The benefit is limited. The IRA owner must be age 70 ½ or older. Additionally, the contribution does not qualify for the deduction for charitable donations. To qualify, the IRA funds must be contributed directly by the IRA trustee to the qualified charitable organization. You can also take advantage of this tax incentive if you itemize or do not itemize deductions.

Unless extended, this incentive will have officially expired after December 31, 2014. It is unclear if Congress will extend the incentive retroactively for 2015 or beyond. If you are considering a charitable contribution from your IRA, please contact our office so we can review the rules in detail.

Several other enhanced charitable giving incentives will no longer be available for the 2015 tax year and beyond. They include special rules for contributions of food inventory.

Clothing and household items

Cleaning out your closet can help generate year-end tax savings. However, not all charitable contributions of clothing and household items are deductible. Generally, clothing and household items donated to a charitable organization must be in good used or better condition. Other rules also apply to donations of clothing and household items. Properly valuing the items to withstand any IRS examination is also important.

Motor vehicles and other types of donations

The tax deduction for a motor vehicle, boat or airplane donated to charity is fraught with complexity. The substantiation requirements depend on the amount of your claimed deduction. If you are considering donating a motor vehicle, boat or airplane to charity, please contact our office so we can help you navigate the substantiation rules to maximize your tax benefits.

The rules for donations of conservation easements, intellectual property and other items likewise require expert planning. Otherwise, you could miss the tax benefit.

Limitations

The Tax Code includes a number of provisions limiting tax-deductible contributions. Limitations may be based on the individual’s income, the type of donation and the nature of the recipient organization. Our office can describe how these limitations may impact you.

As in past years, a provision known as the limitation on itemized deductions applied to higher-income individuals. This provision reduces the total amount of a higher-income individual's allowable deductions; however, some deductions are not impacted. For purposes of the limitation on itemized deduction, a taxpayer's total, itemized deductions do not include deductions for medical expenses, investment interest expenses, casualty or theft losses, and allowable wagering losses; charitable deductions do count, however.

If you have any questions about the mechanics of tax-deductible charitable contributions, please contact our office.

Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.

Use-it or lose-it

The general rule is that no contribution or benefit from an FSA may be carried over to a subsequent plan year. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period) are forfeited. This is known as the “use it or lose it” rule. The plan cannot pay the unused benefits back to the employee, and cannot carry over the unused benefits to the following calendar year.

Example. An employer maintains a cafeteria plan with a health FSA. The plan does not have a grace period. Arthur, an employee, contributes $250 a month to the FSA, or a total of $3,000 for the calendar year. At the end of the year (December 31), Arthur has incurred medical expenses of only $1,200 and makes claims for those expenses. He has $1,800 of unused benefits. Under the “use it or lose it” rule, Arthur forfeits the $1,800. 

Grace period

Because the “use it or lose it” rule seemed harsh, the IRS gave employers the option to provide a grace period at the end of the calendar year. The grace period may extend for 2½ months, but must not extend beyond the 15^th day of the third month following the end of the plan year. Medical expenses incurred during the grace period may be reimbursed using contributions from the previous year.

Example. Beulah contributes $3,000 to her health FSA for 2010. The FSA is on January 1 through December 31 calendar year.  On December 31, 2010, Beulah has $1,800 of unused contributions. Her employer provides a grace period through March 15, 2011. On January 20, 2011, Beulah incurs $1,500 of additional medical expenses. Because these expenses were incurred during the grace period, Beulah can be reimbursed the $1,500 from her 2010 contributions. On March 15, 2011, she has $300 of unused benefits from 2010 and forfeits this amount.

Exceptions

There are other exceptions to the prohibition against deferred compensation within the operation of an FSA. A cafeteria plan is permitted, but not required, to reimburse employees for orthodontia services before the services are provided, even if the services will be provided over a period of two years or longer. The employee must be required to pay in advance to receive the services. 

Another exception is provided for durable medical equipment that has a useful life extending beyond the health FSA’s period of coverage (the calendar year, plus any grace period). For example, a health FSA is permitted to reimburse the cost of a wheelchair for an employee.

If you have any questions on setting up an FSA, whether as an employer or an employee, and which benefits must be covered and which are optional, please do not hesitate to call this office.

When an individual dies, certain family members may be eligible for Social Security benefits. In certain cases, the recipient of Social Security survivor benefits may incur a tax liability.

Family members

Family members who can collect benefits include children if they are unmarried and are younger than 18 years old; or between 18 and 19 years old, but in an elementary or secondary school as full-time students; or age 18 or older and severely disabled (the disability must have started before age 22).  If the individual has enough credits, Social Security pays a one-time death benefit of $255 to the decedent’s spouse or minor children if they meet certain requirements.

Benefit amount

The benefit amount is based on the earnings of the decedent.  The more the decedent paid into Social Security, the larger the benefit amount. Social Security uses the decedent’s basic benefit amount and calculates what percentage survivors may receive. That percentage depends on the age of the survivors and their relationship to the decedent. Children, for example, receive 75 percent of the decedent’s benefit amount. 

Taxation

The person who has the legal right to receive Social Security benefits must determine whether the benefits are taxable. For example, if a taxpayer receives checks that include benefits paid to the taxpayer and the taxpayer's child, the child's benefits are not considered in determining whether the taxpayer's benefits are taxable. Instead, one half of the portion of the benefits that belongs to the child must be added to the child's other income to see whether any of those benefits are taxable to the child.

Social security benefits are included in gross income only if the recipient's "provisional income" exceeds a specified amount, called the "base amount" or "adjusted base amount."  There are two tiers of benefit inclusion. A 50-percent rate is used to figure the taxable part of income that exceeds the base amount but does not exceed the higher adjusted base amount. An 85-percent rate is used to figure the taxable part of income that exceeds the adjusted base amount.

Up to 50 percent of Social Security benefits could be included in taxable income if a recipient's provisional income is more than the following base amounts:

--$25,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and

--$32,000 for married individuals filing a joint return;

--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year

Up to 85 percent of benefits could be included in taxable income if a recipient's provisional income is more than the following adjusted base amounts:

--$34,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and

--$44,000 for married individuals filing a joint return;

--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year.

If the taxpayer's provisional income does not exceed the base amount, no part of Social Security benefits will be taxed. For taxpayers whose income exceeds the base amount, but not the higher adjusted base amount, the amount of benefits that must be included in income is the lesser of:

--One-half of the annual benefits received; or

--One-half of the amount that remains after subtracting the appropriate base amount from the taxpayer's provisional income.

Taxpayers whose provisional income exceeds the adjusted base amount must include in income the lesser of:

--85 percent of the annual benefits received; or

--85 percent of the excess of the taxpayer's provisional income over the applicable adjusted base amount plus the smaller of: (a) the amount calculated under the 50-percent rules above, or (b) one-half of the difference between the taxpayer's applicable adjusted base amount and the applicable base amount. One-half of the difference between the base amount and the adjusted base amount is $6,000 for married taxpayers filing jointly and $4,500 for other taxpayers. For taxpayers who are married, not living apart from their spouse, and filing separately, the amount will always be zero.

If you have any questions about the taxation of Social Security benefits, please contact our office.