// BLOG
Yes You CAN Donate Your 2010 RMD to Charity!
December 20, 2010
Good news for charitable IRA owners over age 70 ½… the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed last week by President Obama, extends the ability to give up to $100,000 directly from your IRA to a charitable institution, tax-free. Furthermore, because this bill was passed so late in the year, you get an extra month to complete the transfer and have it count for your 2010 taxes (transfers made in January 2011 will count as if they were made in 2010).
If you’re not familiar with charitable IRA donations, for the past few years taxpayers age 70 ½ or older have been able to make direct transfers of up to $100,000 per year from their IRA to a charity. By giving the money directly to charity (rather than receiving the distribution then later cutting a check to your favorite charity), taxpayers were able to exclude the IRA distribution from their income.
This was a great strategy for IRA owners who didn’t need the money from the required minimum distribution as they won’t have to pay a large tax bill for IRA withdrawals that they wouldn’t otherwise have taken (if not required to by the RMD rules).
The direct transfer strategy not only reduced their taxable income, but it also reduced their adjusted gross income, which resulted in many taxpayers having less of their Social Security income taxed; it also allowed taxpayers to qualify for credits and deductions that they would not have qualified for otherwise because their income was too high.
This IRA donation strategy was introduced in the Pension Protection Act of 2006 and was originally only intended to apply to the 2007 tax year. It was later extended to include 2008 and 2009. IRA owners who have taken advantage of this strategy were hoping that it would be extended for 2010, but for a while it didn’t look like it would happen. Thankfully, Congress included a provision in the tax bill passed last week to extend the ability to donate IRAs directly to charity for not only 2010, but 2011 as well.
Since this bill was passed so late in the year, you may have already taken your 2010 RMD and written a check to your favorite charity. You can still deduct your donation on Schedule A: Itemized Deductions (if you itemize your deductions). However, please note that you can’t do both. If you do a direct transfer to a charity from your IRA you will exclude the distribution from your income; if you write a check to a charity you will deduct it on Schedule A.
Thanks to Kay Bell at Bankrate.com for the update on RMD charitable donations in “How the New Tax Law Affects Your 2010 Taxes”.
Kristine McKinley is a fee-only financial planner located in Lee’s Summit, Missouri. Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis. To schedule your complimentary introduction meeting, please contact Kristine at kristine@beacon-advisor.com.
President Obama Expected to Sign New Tax Bill Today
December 17, 2010
“We had a responsibility to protect middle class families from a tax increase that would have hit their paychecks and harmed the recovery” – Treasury Secretary Timothy Geithner statement after the House passed the newest tax bill last night.
Nothing like waiting til the last minute…
Financial advisors have been preparing their clients for higher taxes as we waited for Congress to do something to stop the Bush era tax credits from expiring at the end of this year.
Given the slow recovery the economy is experiencing an increase in taxes that would have resulted had the Bush tax cuts not been extended would have been a tough blow, especially for the middle income class.
Congress finally passed a bill that would extend the Bush tax cuts, as well as introduce a few new ones. The bill, called the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 is expected to be signed by President Obama later today.
Here are some of the highlights of the new tax bill:
- The current tax rates have been extended for two years. They were scheduled to go up in 2011. The 10% bracket was going to disappear, and most of the other tax brackets were going to go up, which would have been devastating to taxpayers in this economy. Hopefully the economy will have grown and will be stable before tax rates do go up in 2013.
- The current capital gains and dividends rates have been extended through 2012. This will give many people an opportunity to sell positions that have a gain before capital gain rates go up.
- The Alternative Minimum Tax (AMT) exemption will remain at the higher levels for two more years, giving relief to middle income taxpayers who would have to pay AMT without this band-aid. I’m still looking for permanent AMT changes in the future.
- The new tax bill includes a payroll tax deduction for workers. Workers will get a 2 percentage-point break on their payroll tax for one year. Instead of paying 6.2% on wages up to $106,800, they will only have to pay 4.2% in 2011.
- Unemployment benefits will be extended for another 13 months, giving people who have been unemployed for an extended time period more time to find another job (with unemployment rates still close to 10% this was to be expected).
- The estate tax has been reinstated for 2011, but the top tax rate will be 35% and the exemption amount will be $5 million per person and $10 million per couple. Without this tax bill, the estate tax would have been reinstated at 55% with only a $1 million exemption.
These are just a few of the provisions included in the new tax bill. The response to the new tax bill has been mixed. Some economists say this bill will boost economic growth and create millions of jobs. Others are calling this bill “weak stimulus”. While I’m not sure how much this bill will boost the economy, I do believe that if the Bush tax cuts were allowed to expire the higher taxes that would have resulted would have been very difficult for taxpayers in this struggling economy.
For more information on the new tax bill and how it will affect you, please visit Tax Cut Deal: How it Affects You at CNNMoney.com.
Time Running Out to Do a Roth IRA Conversion in 2010
December 9, 2010
As we near the end of 2010, many people are wondering if a Roth IRA conversion is the right move for them.
Why so much focus on Roth IRAs this year? The rules that determine who can convert a traditional IRA to a Roth IRA have been changed which will allow more people to convert to Roth IRAs. Before 2010, only people with modified adjusted gross incomes of less than $100,000 could convert. Starting in 2010, this income limitation has been lifted, meaning most people are eligible to convert their traditional IRAs to Roth IRAs.
In addition to the income limitation being lifted, the IRS is allowing taxpayers who do a Roth IRA conversion in 2010 to spread their taxes out over two years. So instead of paying it all on your 2010 tax return, you can pay half in 2011 and half in 2012.
This may seem like a no-brainer for people who want to do a Roth IRA conversion in 2010, but don’t leap before you look. Just because you can do a Roth IRA conversion in 2010 doesn’t mean you should do a Roth IRA conversion in 2010.
Questions to Ask When Looking for a Financial Planner
August 20, 2010
Many people hire financial planners to help them meet their financial goals. Whether you are a beginner investor with very little experience or whether you have a good knowledge and understanding of financial planning topics, a financial planner can be a valuable asset when planning for your financial goals. One advantage of working with a financial advisor is the added incentive you’ll have to reach your financial goals.
A financial planner can help with a number of financial questions and goals, such as reviewing your investments to make sure they are appropriate to meet your goals, preparing a retirement projection to show you if you are on track to retire at your desired age or not, reviewing your tax returns to make sure you’re getting all of the tax benefits you are entitled to, or even a comprehensive financial plan which covers all aspects of your financial life.
There are many different types of financial advisors, and most are compensated differently and work differently than other advisors (there’s not a standard fee structure or even a standard service set when it comes to financial advisors), so it’s important to do your homework before you hire a financial professional.
Here are some questions you should ask when interviewing a financial planner:
Time Running Out for 2009 RMD Relief
November 26, 2009
People who received unwanted RMDs in 2009 have just a few days left to roll those RMDs back into their IRAs, thus eliminating the tax bill from the original distribution.
RMDs Suspended
The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) suspended required minimum distributions (RMDs) for 2009. If you’re not familiar with RMDs, these are distributions that you are required to take from your traditional IRA and employer sponsored plans (401Ks) beginning at age 70 ½.
This is a one-time suspension of RMDs, effective for 2009 only. This suspension was created in response to the sharp declines in the stock market, with the purpose of allowing individuals to keep the funds invested in their IRAs instead of being forced to take distributions when the market, and thus their account values, were significantly down.
Unemployment Benefits To Be Extended
November 14, 2009
There’s at least a glimmer of hope for people who are currently unemployed. The Senate voted on Wednesday to extend unemployment benefits by up to 20 weeks for people currently collecting unemployment. Most states will receive a 14 week extension, but states with unemployment rates in excess of 8.5% will receive an additional 6 weeks, for a total extension of 20 weeks.
People who have already exhausted their unemployment benefits can reapply for additional benefits under this bill.
The bill still has to get through the House and then must be signed by the President, but it is not expected to change much before the final passing. This is expected to be the last extension for unemployment benefits.
Reverse Mortgages – What Should You and Your Parents Know Before Applying?
November 1, 2009
The number of reverse mortgages backed by the government jumped nearly 20 percent in March and April (2009) alone from the same period in 2008. At a time when seniors have seen their retirement assets depleted by market losses, tapping home equity has been a safety net. But it can be a risky one.
If your parents are at least 62 years of age and have significant equity in their home, a reverse mortgage can turn that equity into tax-free cash without forcing them to move or make a monthly payment.
If it’s right for them, it’s a worthwhile financial tool. If not, they could make some serious mistakes with their financial future.
Social Security COLA Could Be 0% For Next Few Years
June 30, 2009
In January of this year, people collecting Social Security retirement benefits received one of the highest cost of living adjustment (COLA) increases seen since the 1980s. Unfortunately, that increase may be the last one you see for a few years.
If you are retired and receiving Social Security benefits, you know that your benefits are increased each year to help you keep up with inflation. This is called a cost of living adjustment, or COLA. The COLA is announced in October of each year and is based on the CPI-W (the Consumer Price Index for Urban Wage Earners and Clerical Workers) from the 3rd quarter of the previous year to the 3rd quarter of the current year. Changes announced in October go into effect in January of the next year.
In 2009, retirees saw their benefits increase by 5.8%, due mainly to the high cost of gas during 2008. This was much higher than normal, with the average increase being around 2.8%. Unfortunately, the Congressional Budget Office (CBO) is estimating that there will be no increase in Social Security benefits for the years 2010 through 2012.
It’s Summertime – Time for a Midyear Financial Checkup
June 26, 2009
The weather’s great, so staying inside with your finances probably doesn’t sound like a very entertaining option. But a midyear review of your taxes, retirement and spending issues can be far more valuable than the rushed attempt most people make at the end of the year-or when it’s too late at tax time.
Summer’s actually a good time to do this task because there’s still enough time to correct lapses in savings, spending or tax planning. Here’s what most people should cover:
Retirement savings:
Given the state of the economy, it’s not a bad time to review your retirement funds and your current investment allocation. If you are on schedule to max out your contributions to your company retirement plan this year, great. But don’t forget to check your existing IRAs and other retirement accounts to see if you’ll have enough cash on hand to contribute the maximum in each account by their respective deadlines next year.
Common Social Security Retirement Questions
June 23, 2009
As Baby Boomers are getting closer and closer to retirement, they have many questions about Social Security, such as…
Will Social Security be there for me when it’s my time to collect benefits?
For a long time the media has been telling us that Social Security is going bust. Millions of Americans depend on Social Security to fund all or part of their retirement, so this is a huge concern in our country. So do we really need to worry about Social Security going under before we start collecting our retirement benefits?
The 2009 Social Security Trustees Report anticipates that Social Security benefits paid to retirees will exceed Social Security taxes paid in by workers (and earnings on the funds in the trust) beginning in 2016. In addition, the trust fund could be exhausted by 2037. Once the trust fund is gone, benefits will still be paid out, but the taxes collected from people still working will only be enough to cover 76% of the benefits promised.