IRS Publishes Fact Sheet on New Retirement Options
On December 20, 2019, the SECURE Act was enacted. It was designed to encourage Americans to increase their retirement savings. There are many provisions that will allow IRA owners and other workers to increase their retirement benefits.
Contributions to a Traditional IRA –– In 2020, you can contribute $6,000 of earned income to an IRA and qualify for a deduction. If you are over age 50, you can contribute a “catch up” amount of $1,000, for a total contribution of $7,000. Prior to 2020, workers over age 70½ were not permitted to make an IRA contribution. For tax year 2020 and later years, there is no age limit and most workers can continue to make IRA contributions. IRA contributions are limited in some cases for high income workers who have a workplace plan.
Distributions Can Start Later –– IRA rules generally require individuals to wait until age 59½ to start taking distributions. Individuals are subject to required minimum distributions (RMDs) after age 70½, if they reached that age during 2019. However, individuals who reach age 70½ after January 1, 2020, will have an RMD age of 72. For example, an IRA owner turns age 70½ in 2020 and is age 72 on July 4, 2021. He or she is required to take an initial RMD for 2021 by April 1, 2022. The RMD for 2022 must be taken on or before December 31, 2022.
Birth or Adoption of a Child –– If you are an IRA owner or have a 401(k) or 403(b) plan, you may withdraw up to $5,000 for the birth or adoption of a child. You will pay the normal income tax on a traditional IRA withdrawal, but it will not be subject to the 10% penalty tax on early distributions. Your $5,000 withdrawal must be made within one year after a child is born or the adoption is finalized.
New Rules for Designated Beneficiaries –– IRA and other retirement plans are usually distributed to a designated beneficiary. Prior to 2020, most designated beneficiaries could take distributions over their life expectancy. For IRA owners who pass away during 2020 or later years, most beneficiaries must withdraw the entire IRA within 10 years. There are exceptions to the 10-year payout rule for surviving spouses, minor children, people who are disabled or chronically ill and those who are not more than 10 years younger than the IRA owner who passed away.
529 Qualified Tuition Plans –– It is possible to contribute up to five annual exclusion amounts ($15,000 multiplied by 5 equals $75,000 in 2020) to a qualified tuition program, also known as a 529 plan. The plan contributions are after-tax funds, but will grow tax-free and may be distributed to a student tax-free for qualified educational expenses. The 529 plan now also permits a lifetime withdrawal of up to $10,000 for student loan repayments for a designated beneficiary or his or her sibling.
There are other changes in the SECURE Act that affect individuals and businesses. These include the “kiddie tax,” various disaster relief provisions and extensions of some business benefits. However, the primary purpose of the SECURE Act is to encourage Americans to have more substantial retirement savings.
Senator Grassley Targets Conservation Easements
Sen. Chuck Grassley sent a letter to IRS Commissioner Charles Rettig on November 8, 2019. Grassley requested information on the effectiveness of Notice 2017-10 in reducing the number of syndicated conservation easement partnerships.
Rettig responded on February 12, 2020. He explained that Notice 2017-10 created a listed transaction status for syndicated conservation easement partnerships and required them to file Form 8886, Reportable Transaction Disclosure Statement.
Grassley inquired about the number of investors in syndicated conservation easement transactions. In 2016, there were 12,000 unique investors and in 2017 there were 14,000 unique investors. The charitable deduction benefits of the top-tier syndicated partnerships were $6 billion in 2016 and $6.8 billion in 2017.
The material advisers to the transactions included lawyers, accountants and wealth management professionals. There were 1,532 unique material advisers in 2017. There were also top-tier entity appraisers in both years. There were 23 appraisers in 2016 and 29 appraisers in 2017 for these syndicated partnerships.
Grassley inquired about the investment to deduction ratio. In 2018, the average deduction to investment ratio was 4.87. However, the top 10% of syndicated partnerships had a ratio with a deduction of 9.45 times the investment.
Rettig explained that the Service is aggressively attempting to attack abusive syndicated conservation easement transactions. He stated, “The IRS is committing significant examination and investigative resources to vigorously audit the entities and individuals involved in this scheme, including those who failed to properly disclose their participation as required. Every available enforcement option is considered, including civil penalties and, where appropriate, criminal investigations that could lead to a criminal prosecution.”
In response to the request by Grassley to evaluate the results following Notice 2017-10, Rettig continued, “There was no notable decrease in the volume/dollars of syndicated conservation easement transactions from 2016 to 2017. The IRS identified 249 passthrough entities for 2016 examination from the disclosures filed pursuant to Notice 2017-10. According to the disclosures, the 249 entities claimed total charitable contribution deductions of approximately $6 billion.”
Editor’s Note: Grassley and his staff are working with the Joint Committee on Taxation to update the Charitable Conservation Easement Program Integrity Act of 2019 (S. 170; H.R.1992). The bill would limit tax deductions for syndicated conservation partnership easements to 2½ times a partner’s adjusted basis.
The Land Trust Alliance (LTA) and multiple other organizations have affirmed support of the Charitable Conservation Easement Program Integrity Act. In a press release, LTA noted, “This legislation would prevent abuse of charitable donations while keeping important incentives in place for honest philanthropy.” It is likely that Chairman Grassley will move forward with the legislation this year.
Supreme Court Rules on Tax Refund
In Simon E. Rodriguez v. FDIC; No. 18-1269 (2020), Justice Neil Gorsuch wrote an opinion for a unanimous court. The Supreme Court rejected a federal common law principle named the “Bob Richards Rule” and remanded the case back to the Tenth Circuit.
United Western Bank (UWB) was a subsidiary of United Western Bank Corp., Inc. (UWBI). UWB had losses and received a $4 million refund from the IRS. UWBI declared bankruptcy and UWB was placed in receivership by the Federal Deposit Insurance Corporation. Both the bankruptcy trustee and the FDIC claimed the $4 million refund.
Under the federal common law principle created in Bob Richards Chrysler-Plymouth Corp., 473 F. 2d 262, the $4 million refund belonged to the FDIC because it was vested with UWB as the party that sustained the loss.
Justice Gorsuch opined that federal common law exists only if “necessary to protect uniquely federal interests.” Because the ownership of a tax refund can properly be determined under state law, the Tenth Circuit decision was reversed and the case was remanded.
Editor’s Note: While this was a tax case, the Supreme Court was primarily interested in protecting state property law rights. Generally, ownership is a state property law issue and the tax consequences of that ownership are a federal issue. Justice Gorsuch established a precedent that the federal courts will normally respect state property law.
Applicable Federal Rate of 1.8% for March — Rev. Rul. 2020-6; 2020-11 IRB 1 (18 Feb 2020)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2020. The AFR under Section 7520 for the month of March is 1.8%. The rates for February of 2.2% or January 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.