The Congressional Research Service (CRS) periodically issues fact sheets that are helpful to taxpayers. On December 20th the CRS published a fact sheet on IRA Charitable Rollovers.

The rollover was first passed in the Pension Protection Act of 2006. On December 17, 2010, the President signed H.R. 4853 and the IRA Charitable Rollover is effective for all of 2010 and 2011.

There are seven major features of the IRA Charitable Rollover. Under the bill, the rollover is called a Qualified Charitable Distribution (QCD). To be a QCD, it must meet seven specific requirements.

1. Regular or Roth IRA – The distribution must be made by an IRA owner from his or her account. It may not be made from other types of qualified retirement plans, but those plans may be rolled over into an IRA and then qualify for the distribution.
2. Age – The IRA owner must be over age 70½ when the QCD is made. A QCD for the year the individual turns 70½ is permitted, but must be made after that age.
3. Charities – The recipient must be a public charity qualified to receive tax-deductible contributions.
4. Maximum – While there is no minimum QCD amount, the maximum per year is $100,000.
5. Taxable Income – The QCD is not reported in your taxable income. This means that it does not affect your other charitable gifts, which may be as much as 50% of your adjusted gross income in one year.
6. IRS Custodian – The transfer must be directly from your IRA custodian or trustee to the charitable organization.
7. Taxable Income – The QCD is normally made from an IRA that is potential taxable income. If you have an IRA with both taxable and non-taxed contributions, the IRA withdrawal will be first from the taxable portion of your IRA. Because it is not included in taxable income and it is distributed to charity, there will be no taxable income to you from a QCD.

Editor's Note: The bill signed by the President on December 17th has a very important provision. Because it is very late in the year, many individuals will find it difficult to complete their 2010 QCD this year. Therefore, the bill allows you to make your 2010 QCD in January of 2011. For some friends of charities, they can make two QCDs in 2011 -- one in January and the normal 2011 QCD during the balance of the year.

2011 Tax Rates Published

In Rev. Proc. 2011-12, 2011-2 IRB 1 (21 Dec 2010), Treasury published Tax Rate Tables for 2011.

TABLE 1 - Section 1(a) – Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is:		The Tax Is:
Not over $17,000		10% of the taxable income
Over $17,000 but not over $69,000		$1,700 plus 15% of the excess over $17,000
Over $69,000 but not over $139,350		$9,500 plus 25% of the excess over $69,000
Over $139,350 but not over $212,300		$27,087.50 plus 28% of the excess over $139,350
Over $212,300 but not over $379,150		$47,513.50 plus 33% of the excess over $212,300
Over $379,150		$102,574 plus 35% of the excess over $379,150

TABLE 2 - Section 1(b) – Heads of Households

If Taxable Income Is:		The Tax Is:
Not over $12,150		10% of the taxable income
Over $12,150 but not over $46,250		$1,215 plus 15% of the excess over $12,150
Over $46,250 but not over $119,400		$6,330 plus 25% of the excess over $46,250
Over $119,400 but not over $193,350		$24,617.50 plus 28% of the excess over $119,400
Over $193,350 but not over $379,150		$45,323.50 plus 33% of the excess over $193,350
Over $379,150		$106,637.50 plus 35% of the excess over $379,150

TABLE 3 - Section 1(c) – Unmarried Individuals (other than Surviving Spouses and Heads of Households)

If Taxable Income Is:		The Tax Is:
Not over $8,500		10% of the taxable income
Over $8,500 but not over $34,500		$850 plus 15% of the excess over $8,500
Over $34,500 but not over $83,600		$4,750 plus 25% of the excess over $34,500
Over $83,600 but not over $174,400		$17,025 plus 28% of the excess over $83,600
Over $174,400 but not over $379,150		$42,449 plus 33% of the excess over $174,400
Over $379,150		$110,016.50 plus 35% of the excess over $379,150

TABLE 4 - Section 1(d) – Married Individuals Filing Separate Returns

If Taxable Income Is:		The Tax Is:
Not over $8,500		10% of the taxable income
Over $8,500 but not over $34,500		$850 plus 15% of the excess over $8,500
Over $34,500 but not over $69,675		$4,750 plus 25% of the excess over $34,500
Over $69,675 but not over $106,150		$13,543.75 plus 28% of the excess over $69,675
Over $106,150 but not over $189,575		$23,756.75 plus 33% of the excess over $106,150
Over $189,575		$51,287 plus 35% of the excess over $189,575

TABLE 5 - Section 1(e) – Estates and Trusts

If Taxable Income Is:		The Tax Is:
Not over $2,300		15% of the taxable income
Over $2,300 but not over $5,450		$345 plus 25% of the excess over $2,300
Over $5,450 but not over $8,300		$1,132.50 plus 28% of the excess over $5,450
Over $8,300 but not over $11,350		$1,930.50 plus 33% of the excess over $8,300
Over $11,350		$2,937 plus 35% of the excess over $11,350

 Standard Deduction – For a married couple, the standard deduction is $11,600. Single persons have a standard deduction of $5,800.
 Aged or Blind – The additional deduction for an aged or blind person is $1,150. It is $1,450 for a single person who is not a surviving spouse.
 Personal Exemptions – The personal exemption in 2011 will be $3,700.

Loan on Lapsed Policy Taxable

In John Morgan Sanders v. Commissioner; T.C. Memo. 2010-279; No. 3395-09 (19 Dec 2010), the Tax Court determined that the loan on a lapsed insurance policy produced taxable income.

John Sanders purchased a $25,000 whole life policy from New York Life Insurance Co. (New York Life) in 1979. He paid $31 per month from 1979 until March of 2006.

Under the terms of the policy, he was permitted to borrow the cash value from the policy at an 8% accrued interest rate. Mr. Sanders borrowed $7,136 from the policy between 1990 and 2004.

On February 9, 2006, New York Life indicated by letter to Mr. Sanders that the loan balance was $17,203 for the principal and accrued income. This amount exceeded the cash value by $517 and the policy would be cancelled unless Mr. Sanders remitted that amount. He did not and New York Life terminated the policy on March 10, 2006.

After terminating the policy, New York Life sent a Form 1099R to report a distribution of $17,292. The amount was divided into the premium of $10,117 and a taxable distribution of $7,175. The IRS required Mr. Sanders to recognize $7,175 of taxable income as a result of the distribution.

At trial, Mr. Sanders claimed that the $7,175 constituted "draws" that were not taxable. However, the court noted that the general principle is that amounts received from an insurance policy constitute gross income to the extent they exceed the investment in the contract. Sec. 72(e)(1)(A). Therefore, the termination of the policy resulted in a construction distribution to Mr. Sanders. This distribution is taxable income.

Editor's Note: Loans are permitted against many types of permanent insurance. Some policy owners take loans with no intention of repaying the loan. Interest on these loans often accrues and the loan balance increases. It is prudent to make certain that there is a reasonable reserve level in the policy. If there is a loan against the policy and the individual survives to a very senior age, it is quite possible that the loan will exceed cash value and the policy will be terminated. As Mr. Sanders discovered, termination of that policy will lead to a large income tax bill with no cash distribution.

Applicable Federal Rate of 2.4% for January -- Rev. Rul. 2011-2; 2011-2 IRB 1 (21 Dec 2010)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2011. The AFR under Section 7520 for the month of January will be 1.8%. The rates for December of 1.8% or November of 2.0% 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 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.