Legislation renews IRA charity tax break

Joel M. Blau, CFPThe Protecting Americans from Tax Hikes Act of 2015 was signed into law on Dec. 18, 2015. The law renews a long list of tax breaks known as “extenders” that have been expiring on an annual basis. This legislation makes some of the rules effective through Dec. 31, 2016. Others are effective through 2019, and some are effective permanently.

Provisions in the Act also make changes to existing tax rules that were not part of the extenders. All of these changes will affect your tax planning now and in future years.

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If you're over age 70½ and are required to take a minimum distribution from your IRA, you'll again have the option to make that distribution tax free by directing it to the charity of your choice. President Obama has signed a legislative package that included making permanent "qualified charitable distributions" (QCDs). The provision for tax-free distributions from IRAs to charities is now permanent. This break allows qualifying IRA owners to make a qualified distribution of up to $100,000 from the IRA to a charity. The transfer counts as a required minimum distribution yet is excluded from your gross income.

Ronald J. Paprocki, JD, CFP, CHBCThese distributions can be a convenient way to support charitable causes and get a tax break while meeting tax requirements for IRAs. However, as with any change to the tax code, you must adhere to a number of criteria to ensure the tax savings.

You should be well aware of the following:

• A QCD permits annual direct transfers to a qualified charity up to $100,000 that can be excluded from taxable income, but still count toward satisfying the Required Minimum Distribution (RMD).

• Funds distributed to the IRA owner first, no matter how briefly, then contributed to charity do not meet the criteria for a QCD.

• Checks issued by the IRA custodian must be made payable to the charity, but can be mailed to the IRA owner to provide an opportunity to photocopy the check to maintain complete records (recommended).

• Only IRA owners age 70½ and older can take advantage of making a QCD. The QCD must literally occur on or after the day the individual turns 70½ to meet the criteria.

Next: The charitable entity must be an organization that qualifies for a charitable income tax deduction of an individual.

• The charitable entity must be an organization that qualifies for a charitable income tax deduction of an individual. Donor-advised funds, supporting organizations, or private non-operating foundations do not qualify.

• The receiving charity must provide the IRA owner with the same contribution acknowledgment needed to claim a charitable income tax deduction, indicating that no goods or services were received in exchange for the contribution. Failure to produce this in the event of an Internal Revenue Service audit will disallow the QCD.

• QCDs can be made from any IRA (including an annuity), but not from a simplified employee pension-IRA, SIMPLE (Savings Incentive Match Plan for Employees) IRA, or inherited IRA.

• The QCD will be included in the distribution amount the IRA custodian reports on the Form 1099R. It’s up to the IRA owner or their tax preparer to report how much of the distribution went to charity.

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Other factors that can affect a decision to make an IRA charitable distribution include whether your charitable contributions exceed your otherwise deductible limit, whether you itemize deductions, the potential loss of tax-deferred growth on the amount distributed from the IRA, and the effect on the size of future RMDs.

Next: How do bonds react to changes in interest rates?

How do bonds react to changes in interest rates?

Bonds are issued by corporations or municipalities, which “promise” to pay you a predetermined amount of interest, typically on a semi-annual basis, plus return your principal to you on a specified maturity date. As an investor, you can choose to hold the bond until maturity or sell it prior to maturity through the municipal bond marketplace and receive proceeds based on the bond’s current value. This is known as “market risk.”

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As interest rates rise, the value of an existing bond decreases, since it pays a fixed rate of interest lower than what is being offered in the market. On the other hand, bond values appreciate when interest rates decline. This inverse relationship means a bond’s market value is dependent on the number of years remaining until maturity. The longer the maturity time frame, the more sensitive the bond will be to interest rates.

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Questions of general interest will be chosen for publication. The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.

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