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Charitable IRA Distributions and the Significance of the PATH Act

Charitable Giving - Buffalo Rochester NY

Giving From IRAs Now An Annual Planning Opportunity

Since 2006, individual taxpayers have had the ability to make gifts to charity directly from their IRAs, traditional or Roth, through a temporary measure that first appeared in the Pension Protection Act. However, over the years, that provision expired and renewed several times. It could not be relied upon for planning purposes, until extender bills were passed. At the end of 2015, the Protecting Americans from Tax Hikes (PATH) Act made charitable giving from IRAs permanent. With permanency, a great planning opportunity exists.

The ability to gift from your IRA directly to a charity is available only to those individuals who have achieved age 70 ½ or older. It is important to note that the gift must be processed as a direct rollover from the IRA trustee to the charity. If you receive the distribution and then make a donation to charity, none of the following advantages will apply.

Exciting advantages await…

So what are the advantages? First of all, it counts toward your required minimum distribution (RMD). Say that you have enough income from other sources that you really don’t need your RMD that year, and you wish that taking it wouldn’t result in you owing more taxes. Instead, you can gift that amount (up to $100,000) out of your IRA to charity, and have that count as your RMD. (Note that any amounts taken in excess of your current year RMD will not count toward the next year’s RMD.)

Next, and perhaps more importantly, since the gift is made by rollover, it avoids inclusion in income and adjusted gross income (AGI). This is the exciting part!

First, it will not inflate your income, which would increase the likelihood of your Social Security becoming taxable. Second, it will not inflate your AGI, which is used to calculate the limitations on your medical expense itemized deduction and certain other miscellaneous itemized deductions. Other limitations that are triggered by a higher AGI are the phase-out of itemized deductions and the personal exemption. Again, since the gift is not included in AGI, the risk of inflating AGI and triggering these phase-outs is eliminated. Even if you no longer itemize deductions, this still provides an opportunity for charitable giving, without increasing your income that would be included in the calculation to determine if your Social Security is taxable.

There is an annual limit of $100,000, so it is important to note that this is not a one-time allowance, but an annual planning opportunity. Married couples who file jointly, and the spouse also has an IRA, could combine the annual limit and contribute up to $200,000.

The fine print: What qualifies and what doesn't?

We’ve covered above that it must be a direct transfer from the IRA trustee to the charitable organization, by a person at least 70 ½ years of age, and from a traditional or Roth IRA (401(k), SIMPLE IRAs and SEP plans do not qualify). In addition, the contribution must be made to an organization that qualifies as a charitable organization under Code Section 170(b)(1)(a). Donor advised funds, private foundations, trusts, and gift annuities are examples of some recipient organizations that do not qualify for this treatment. The effect on your state income tax could be different, depending upon where you live. Certain states, like New York, may already exclude a portion of retirement income from state taxation, so using this strategy may not yield as great a state tax savings as on the Federal side.

Careful not to double dip!

Don't fall into the trap of thinking you avoid including the charitable distribution in income AND you get to deduct it on your taxes. That would be double-dipping. Your benefit comes from not having to include it in income, and the intangible benefits from knowing you donated to a worthy cause.

Your unique situation cannot be addressed in an article of this nature. As always, we recommend you speak with your tax advisor when planning to use this strategy.

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New Opportunities for the Research and Development Tax Credit

R&D Tax Credits - Buffalo Rochester NYIn 2015, two new sets of published tax rules provided several favorable developments for U.S. taxpayers claiming the research and development (R&D) credits. Many taxpayers, including for example those who developed software interface for third parties to engage in business through the internet, could benefit from these rules.

Proposed treasury regulations, released on January 16, 2015, clarified the types of activities for developing internal use software (IUS) that are eligible for the credit. In addition, the “Protecting Americans from Tax Hikes” Act (PATH Act) enacted on December 18, 2015 established laws that promoted the ability of most taxpayers, including start-up businesses, to claim the credit.

Under the PATH Act, the following provisions were enacted into law:

  • The Credit is Now Permanent. The R&D credit, which had expired for amounts paid or incurred after December 31, 2014, was retroactively reinstated and made permanent. Fiscal year taxpayers whose tax year ended in 2015 might want to file amended returns to claim the credit for amounts paid or incurred on or after January 1, 2015, and before the end of their fiscal year.

  • Certain Small Businesses Can Use the Credit to Offset Alternative Minimum Tax. Beginning with the 2016 tax year, eligible small businesses (ESB) and their owners can claim the R&D credit against the alternative minimum tax liability. An ESB includes partnerships, sole proprietorships, and privately held corporations whose average annual gross receipts for the three-tax-year period preceding the tax year for claiming the credit does not exceed $50 million.

    R&D credits determined for a partnership or S corporation are not treated as ESB R&D credits by any partner or shareholder unless that partner or shareholder also meets the gross receipts test for the tax year in which the credits are claimed.

  • Certain Small Businesses Can Use the Credit to Offset Payroll Tax. Beginning with the 2016 tax year, a qualified small business (QSB) can elect to use the R&D credit against the employer’s old-age, survivors and disability insurance liability (i.e., FICA taxes). The election can be made for up to five tax years.

    The R&D credit is allowed to offset payroll taxes for the first calendar quarter which begins after the date on which the taxpayer files their tax return with the election. A QSB doesn’t include tax exempt organizations.
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    Generally, the portion of the credit eligible to offset payroll tax is limited to the lesser of $250,000, the current year credit, or for regular corporations, the amount of the credit carryforward from the tax year determined without regard to the election.

    The credit does not reduce the amount of the FICA payroll expenditure otherwise allowed as a deduction.

    Generally, a QSB is a company that has less than $5 million in gross receipts for the current tax year and no gross receipts for any tax year before the five tax year period ending with the current tax year.

The proposed regulations on internal use software included the following guidance:

  • IRS Noted the Increasing Importance of Computer Software for Businesses. The government explicitly narrowed the application of the IUS rules to general and administrative (backroom) functions. Activities associated with IUS have a much higher threshold and by limiting their application this effectively expanded the software activities eligible for the credit.

  • Website Design Costs. Many businesses develop websites to interface with third parties which may qualify for the credit. The IRS acknowledged that certain of these costs were never subject to the much more narrow IUS rules. As a result, taxpayers may have an opportunity to claim more credit. They should review their web design/third party interface costs for prior open years and file amended returns if they determine these costs were eligible for credit under the standard, less restrictive R&D credit rules.

For more insight, observations and guidance on the R&D Tax Credit, visit our Freed Maxick Guide to the Federal Research and Development Tax Credit webpage.

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