Thursday December 7, 2023
IRA Required Minimum Distributions by December 31
One exception to this applies to IRA owners who turned age 72 in 2022. These individuals may delay their first RMD until April 1, 2023. However, if their first RMD is delayed, a second RMD will be required by December 31, 2023.
RMDs are generally required for most qualified retirement plans and apply to three types of IRA: Individual Retirement Arrangements (IRAs), Simplified Employee Pension Plans (SEPs) and Savings Match Plans for Employees (SIMPLE) IRAs.
RMDs also apply to 401(k), 403(b) and 457(b) plans. An exception to the RMD requirement is a Roth IRA - there are no distribution requirements for this plan as long as the original owner is living.
Most taxpayers take a RMD based upon the Uniform Lifetime Table in IRS Pub. 590-B. This table assumes two beneficiaries, one of which is no more than 10 years younger than the IRA owner, and calculates a distribution amount based on both ages. If the IRA owner has a spouse more than 10 years younger, a special calculation is applicable.
Owners of multiple IRAs must calculate the RMD for each plan. However, the owner can elect to withdraw the total RMD amount from any IRA plan.
Some employees over age 72 who are still working and are not major owners of a business may be able to defer their RMDs until after retirement. Employees should consult with a tax advisor if this exception is applicable.
Many online calculators are available to determine a RMD. Most large financial companies offer an online determination of the correct amount. RMDs start at approximately 3.6% of the December 31st IRA balance and increase each year after age 72. There are online worksheets on IRS.gov that may be helpful.
The IRS released new IRA distribution tables for 2022. The new tables reflect longer life expectancies and future RMDs will be slightly reduced.
Editor's Note: An excellent way to fulfill an RMD is to give part or all of the IRA distribution to a qualified charity. Qualified charitable distributions (QCDs) for individuals over age 70½ may fulfill part or all of your RMD. The QCD is a direct transfer from the IRA custodian to a qualified charity, up to $100,000 may be transferred in a single year. It is important to act quickly if you plan to do a QCD this year. Your QCD must be completed by December 31, 2022 if it is intended to satisfy your 2022 RMD.
Charitable Giving Coalition Supports the Nonitemizer Deduction
On November 14, 2022, over 300 Charitable Giving Coalition (CGC) members sent a letter to Congressional leaders. The CGC, which represents thousands of charitable organizations across the nation, urged Congress to renew and expand the charitable deduction for nonitemizers.
Giving USA reported that Americans gave $485 billion to charity in 2021. However, this number was 0.7% lower than the inflation-adjusted gift level of the prior year. Independent Sector conducted a survey in September 2022. With widespread concerns about high inflation this year, about half of the respondents indicated they would be planning to give less to charity in 2022. This could be a challenging year for many nonprofits who rely on annual fund giving.
CGC emphasized that the "charitable deduction is good tax policy." It enables individuals with resources to assist those who are in need. However, the charitable deduction (which permits deductibility of gifts each year up to 60% of adjusted gross income) is available only for taxpayers who itemize. Because the standard deductions dramatically increased in 2018 and later years, only 12% of taxpayers are expected to itemize.
During the COVID-19 pandemic, CGC noted that Congress passed a universal charitable deduction which "expired at the end of 2021, creating uncertainty for Americans and the charities that rely on their donations to serve their communities."
Charitable gifts continue to support many different needs in America. These include natural disaster recovery, food banks, care for the homeless and many other services. The Universal Giving Pandemic Response and Recovery Act has been introduced in the House and Senate. It is a bipartisan bill that would increase the expired nonitemizer charitable deduction and permit above-the-line gifts to donor advised funds.
CGC concluded, "We encourage you and your colleagues to renew and expand the nonitemizer universal charitable deduction in year-end legislation."
A November 14 webinar by the National Council of Nonprofits (NCN) also addressed the issue. NCN Representative Donna Murray-Brown stated, "There is an immediate and obvious fix for us here. Congress should enact the strongly bipartisan Universal Giving Pandemic Response and Recovery Act."
At the same webinar, Laura Walling of Goodwill Industries, Inc. stated that another important tax provision is restoration of the employee retention credit (ERC). Walling advocated for passage of the Employee Retention Tax Credit Reinstatement Act. The ERC was no longer available after 2021. Many nonprofits have filed 2021 ERC claims and are still waiting for checks from the IRS. The National Council of Nonprofits sent a letter to the IRS and expressed concern about this backlog.
Walling concluded, "We are continuing to sound the alarm there." She recommends that charities waiting for ERC checks should contact the IRS helpline on the Employee Retention Credit.
Estate and IRS in Cryptocurrency Valuation Dispute
Matthew T. Mellon II passed away at age 54 on April 16, 2018. The Internal Revenue Service (IRS) and his estate have become involved in a valuation dispute over cryptocurrency XRP. This cryptocurrency was developed by Ripple Labs, Inc.
There have been liquidity restrictions placed on a number of holders of XRP. These restrictions limit "the ability of some holders to sell Ripple XRP tokens, imposing without limitation, contractual liquidation restrictions." Ripple Labs has enforced the liquidity restrictions by bringing suit against several former executives who allegedly did not comply with the sales volume limits.
The IRS increased the value of the estate by $91.5 million and assessed a $36 million deficiency. Most of the deficiency was related to the increase in the value from XRP.
The IRS claims that the Mellon XRP tokens were not "subject to contractual liquidity restrictions." While there was a settlement agreement between Mellon and Ripple, the IRS denies the contractual agreement included restrictions.
Mellon's estate obtained a valuation by Empire Valuation Consultants. The valuation considered "(1) the extreme volatility of cryptocurrency, (2) the uniqueness inherent in Ripple XRP tokens and the inherent unpredictability and volatility in the market for the same, (3) blockage and other factors and (4) the liquidation restrictions."
The Empire appraisal claimed it would take 3.91 years to liquidate the estate's Ripple XRP tokens and the IRS agrees with that determination. The IRS claims, however, that XRP volatility would not support a valuation discount.
Editor's Note: Cryptocurrency XRP is down approximately 70% in 2022. The price has varied from a peak of $2.70 to $0.38 at publication date. It is probable that the volatility of the cryptocurrency marketplace will produce major future valuation conflicts with the IRS. Since most cryptocurrency owners are still young, many of these disputes will be in the future.
Applicable Federal Rate of 5.2% for December -- Rev. Rul. 2022-22; 2022-49 IRB 1 (15 November 2022)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2022. The AFR under Section 7520 for the month of December is 5.2%. The rates for November of 4.8% or October of 4.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.