Month: October 2017

Charitable giving in the U.S. rose 2.7% last year, reaching an all-time record of $390.05 billion. That’s also a record in inflation-adjusted dollars, reports the Giving USA Foundation in its annual report on philanthropy. Individuals, foundations, and corporations contributed to the robust growth in philanthropy, while bequests were projected to have declined by 9.0%. Some 72% of charitable gifts come from individuals—an average of $2,240 per U.S. household.

Religious organizations are the largest beneficiaries of charitable giving, receiving 32% of the total gifts. Education comes in a distant second, at 15%, followed by human services with 12%.

The charitable IRA rollover

One reason for the growth in giving may be the growth in assets. As the stock markets touch new highs, people can afford to be more generous. Another factor might be that as top marginal tax rates have increased, the value of charitable deductions for top taxpayers has grown as well.

A popular charitable giving tax break has been made permanent, one that has been dubbed the “charitable IRA rollover.” Those who are over age 70½ may want to consider the gift of a direct distribution from their IRAs. Up to $100,000 may be transferred to charity in this manner. Couples may transfer up to $200,000 if each partner has an IRA. In contrast to normal IRA distributions, amounts transferred directly to charity won’t be included in ordinary income (and so no charitable deduction is appropriate).

The definition of who is permitted to take advantage of this tax strategy dovetails perfectly with those who are required to take required minimum distributions (RMDs) from their IRAs. So some taxpayers simply opt to direct their required minimum IRA distributions to charity, because the distribution requirement will be satisfied, even though the amounts distributed aren’t included in taxable income.

Extra tax advantages

In some sense, the income tax exclusion for a transfer to charity from an IRA might not seem like such a big deal. After all, one always has been allowed to follow an IRA withdrawal by a charitable contribution and claim an income tax deduction. However, the full benefit of that deduction is not available to all taxpayers.

• Nonitemizers. There are a great many taxpayers who do not itemize their deductions, even in the upper tax brackets.
• Big donors. Percentage limits on the charitable deduction mean that some donors can’t take a full charitable deduction in the year that they make a gift.
• Social Security recipients. An increase in taxable income may cause an increase in the tax on Social Security benefits for some taxpayers. The direct gift from an IRA avoids this problem.

Accordingly, if you are 70 ½, you should consider a charitable gift from your IRA if:

• You do not itemize tax deductions;
• Your charitable deductions have been maximized; or
• You do not need the additional income made necessary by your required minimum distribution.

As welcome as this tax planning opportunity is, every taxpayer’s situation is unique. See your tax advisor before taking any action.

© 2017 M.A. Co. All rights reserved.

Two law professors at Washington State University have warned that the IRS has turned to data mining of social media in their enforcement efforts [Houser and Sanders, “The Use of Big Data Analytics by the IRS: Efficient Solutions or the End of Privacy as We Know It?”, 19 Vand. J. Ent. & Tech. L. 817 (2017), http://www.jetlaw.org/wp-content/uploads/2017/04/Houser-Sanders_Final.pdf]. The demise of the Taxpayer Compliance Measurement Program left a data gap that needs to be filled, and social media may provide part of the solution.

The professors warn of the dangers of abuse of secret data collection systems. Taxpayers may have an expectation of privacy when they are online, but this is an error. Anything that may be seen by the public may be seen by the IRS. The Service then pairs this information with its own databases in a process of data analytics. “For the IRS, data analytics is not trying to predict the future behavior of taxpayers, but predicting data that it does not have; that is, predicting whether tax returns are compliant with the tax law.” Given the data breaches that the IRS itself has experienced, as well as questionable IRS targeting practices of recent years, the concerns raised by the professors seem warranted.

Don’t publish anything on social media that would make you uncomfortable if you saw it on the front page of The New York Times.

© 2017 M.A. Co. All rights reserved.

There are an estimated 94 million mutual fund investors in the U.S., reports the Investment Company Institute in its 2017 Investment Company Fact Book. Those investors represent 54.9 million households, or roughly 43.6% of all U.S. households. That level of mutual fund ownership has held steady during this century.

43.6% of U.S. households own mutual funds

Year	% households
1980	5.70%
1985	14.70%
1990	25.10%
1995	28.70%
2000	45.70%
2005	44.40%
2010	45.30%
2015	43.00%
2016	43.60%

Source: 2017 Investment Company Fact Book

The explosive growth in mutual fund ownership after 1980 may be attributable to the advent of 401(k) plans. Indeed, for 67% of households their first mutual fund purchase was through an employer-sponsored retirement plan. Some 37% of those who own mutual funds own them only inside such plans. Mutual funds owned in IRAs, which first became widely available in 1981, may also account for this spectacular growth.

As one might expect, as household income rises, the odds of finding mutual fund investors rises also. Some 80% of U.S. households with income over $100,000 are mutual fund owners. Still, mutual funds are certainly not just for the very affluent. 17% of mutual fund-owning households reported income of less than $50,000. The median income of households owning mutual funds was $94,300.

Why invest in mutual funds? According to the survey, which permitted multiple answers to the question, 92% are saving for retirement, 46% hold mutual funds to reduce taxable income, 46% are saving for emergencies, and 22% use mutual funds to save for education. For 64% of these savers, more than half of their financial assets are mutual funds.

U.S. mutual funds grew to $16.3 trillion in 2016. Domestic and international equity funds compose 52% of the total industry assets, bond funds 22%, money market funds 17%, and hybrid funds 8%.

© 2017 M.A. Co. All rights reserved.

Under current law, when an heir inherits a Roth IRA or an IRA from someone who has not yet begun receiving minimum distributions, he or she must make a choice. The money must be distributed either within five years or over the heir’s lifetime. For lifelong distributions, the heir will need to withdraw a minimum amount each year based upon IRS life expectancy tables. This strategy is referred to by estate planners as a “stretch IRA.”

For a young heir, such as a child or grandchild, stretching payments over a lifetime, maximizing the period of tax deferral or tax freedom, can make an enormous difference in the total value of this financial resource. That’s because in the early years the required minimum distributions are likely to be less than the growth in the value of the account, which allows for additional tax-free or tax-deferred accumulations.

Writing in Trust & Estates magazine (June 2017), James Lange explores the alternatives for a 46-year-old heir who inherits a $1 million traditional IRA. Assuming a 7% rate of return, if the child takes only the minimum distributions for life the account will peak at about $2.7 million at age 76, and it will be worth $2.5 million at age 82. On the other hand, if the account is fully distributed within five years and subjected to ordinary income taxes, and the proceeds are placed in a taxable portfolio, the same pattern of withdrawals will exhaust the account at age 82.

Too Good to Last?

Lange’s article is titled “The Latest Developments in the Death of the Stretch IRA.” There hasn’t been much press attention to the issue, but last year the Senate Finance Committee voted unanimously for the Retirement Enhancement and Savings Act of 2016. One critical “enhancement” was the elimination of the vast majority of stretch IRAs in the future.

Under the bill, nearly everyone will have to abide by the five-year rule for inherited IRAs and lump sum death benefits from qualified retirement plans. There are exceptions for surviving spouses and disabled dependents, for whom lifelong distributions would be permitted. If a beneficiary is a minor, the five-year distribution rule would not kick in until he or she reaches the age of majority. There are also exceptions for charities, charitable remainder trusts, and beneficiaries who were born within 10 years of the account owner.

Nothing Can Be Simple

The bill also carves out the first $450,000 in IRA assets from the application of the five-year rule. Therefore, a new wrinkle will be added to estate planning.

In estates in which combined IRA balances are less than $450,000, no change of plans will be needed (assuming that the exclusion isn’t changed in final legislation). Estates with larger IRAs may need to be reviewed and new plans devised, if the new rules are adopted.

Prospects

Lange makes much of the fact that, given the unanimous vote, the elimination of the stretch IRA has bipartisan support. On the other hand, the bill died last year, and it has not be reintroduced as of this writing. Will there be tax reform this year? One of the difficulties of developing a consensus for a tax reform bill is the need to “pay for” tax cuts with other tax increases, so as to stem the revenue loss. The stretch IRA is a low-hanging fruit that looks ripe for harvest by eliminating it. The Joint Committee on Taxation scored the provision as raising $3.8 billion over the next ten years. But if tax reform bogs down, and gets pushed into 2018 (at this moment, the most likely outcome), the stretch IRA remains safe for another year or so.

©2017 M.A. Co. All rights reserved.