Is Giving IRA Assets to Charity Still OK?

New regulations have a lot of people with questions concerning the tax consequences of charitable donations. I thought you might find this article from the Wall Street Journal informative. Please leave a comment and let me know what you think. I would love to hear from you!

When lawmakers left Washington for their summer break, they left a lot of retirement proposals up in the air.

As a result, readers like Albert C. Thomas Jr. want to know what happened with a bill that would let older people continue to make tax-free IRA distributions to charity.

Mark Matcho
The short answer: Nothing—yet. But if the handful of retirement-savings provisions still on the table make it into law later this year, consumers could still make those tax-free donations—as well as leave assets in their 401(k)s while converting them to tax-free Roth status, among other changes.

It isn’t clear how many efforts to help taxpayers bolster their nest eggs—and make it easier to pass along those assets to their families tax-free—will actually break through the congressional logjam. Campaign season has started, making it tough to get much done in Washington—at least until after Nov. 2.

Here is a look at some important retirement proposals and how to plan for them:

• Giving IRA assets to charity. For the past few years, people at least 70½ years old have been allowed to donate as much as $100,000 a year from their individual retirement accounts to charity, count it as their required annual IRA distribution—and avoid paying tax on that amount.

This special “qualified charitable distribution” provision ran out at the end of 2009. Earlier this year, it looked like it would be extended as part of an unemployment-benefits bill, but dozens of such items were dropped on concerns over how to pay for them.

“It’s more likely than not to get done, but there are lots of things that seem to be jammed up this year,” says David Certner, legislative policy director for AARP, the Washington advocacy group. Even if the tax break is restored, it might not happen until late in the year.

The take-away for older IRA owners interested in donating IRA withdrawals: Sit tight. You still can do it through Dec. 31.

Three points to keep in mind: You can’t take an additional tax deduction for these donations; some types of charities—such as donor-advised funds and private foundations—typically don’t qualify; and the gifts have to go directly from the IRA to the charity, so don’t withdraw the money now and put it in your bank account first.

A qualified charitable distribution may make particular sense for taxpayers trying to convert large chunks of their traditional IRAs to Roth accounts, from which future withdrawals that meet holding requirements are generally tax-free. Here is why: Instead of having to pay tax on your required withdrawal amount and any additional amount you convert to a Roth, you would owe only tax for the amount converted to a Roth, says Ed Slott, an IRA consultant in Rockville Centre, N.Y.

• Getting more money into Roth accounts. The Small Business Jobs Act, which has passed the House and is expected to be considered by the Senate this month, includes a number of ways to boost retirement savings.

First, it would permit state and local government retirement plans (known as 457 plans) to allow participants to contribute to Roth accounts. Other employers already can offer Roth versions of their retirement accounts, including 401(k) and 403(b) plans.

The bill also would permit employer plans to let workers in traditional 401(k)s, 403(b)s or 457s who are already eligible for distributions roll over pretax account balances into a Roth account of the same type starting this year, according to Mark Luscombe, principal analyst at CCH, a Wolters Kluwer company that provides tax and legal information.

That would allow such an employee who likes his 401(k) plan but wants a Roth to convert it to a Roth 401(k), rather than having to move the assets to a Roth IRA, says Robert Keebler, a CPA in Green Bay, Wis. The chief advantage of such a move: Employer-sponsored accounts “have stronger creditor protection,” he says. “Nobody’s going to take your retirement account away from you.”

Of course, such rollovers would be taxable (except for any after-tax contributions), which the federal government sees as a way to raise money short-term. But retirement savers who convert to a Roth by Dec. 31 wouldn’t have to pay it all right away. They could spread the amount on which they owe tax across their 2011 and 2012 tax returns.

If the legislation is enacted this fall, workers near retirement should watch closely for any alerts from their employer—and might want to think about how they would pay conversion tax bills later.

One question hangs over the provision: Whether plan participants would have the option to unwind such Roth conversions if their investments later fall in value and they don’t want to pay tax on income that no longer exists. When IRA owners convert traditional IRAs to Roths, they can file for a tax extension until Oct. 15 of the year after they do the conversion. That gives them many months of wiggle room in which to reverse a Roth conversion through a process called “recharacterization.”

It isn’t clear whether the small-business bill’s language includes such a do-over for people converting other types of retirement accounts to Roths. Several tax experts interviewed expect the option to be allowed; otherwise, there is little incentive to stick with a company plan.

If the law is passed without the do-over option, and an account-holder still wants to stick with the employer plan for the additional protection from creditors, Mr. Keebler suggests doing incremental conversions—maybe eight over 24 months. “You don’t want to convert an account worth $100,000 and have the market get beat up and have it go down to $80,000, or $50,000, in value,” he says.

4 tips for caring for mom and dad

Do you have an elderly parent that either requires help now or may at some point in the future? Please leave me a comment and let me know what’s working for you or what thoughts you currently have on how you will meet the challenge if it shows up in your future. This article from MONEY Magazine may get you thinking.

Nearly half of caregivers recently surveyed reported increased financial worries. Here’s how they’ve had to sacrifice.

(MONEY Magazine) — Caring for an ailing or aging parent is never easy, but the challenges only multiply when Mom and Dad live far away.

Nearly 7 million Americans care for an elderly relative from a distance, reports the National Alliance for Caregiving (NAC). If you’re among them, you know full well the guilt and anxiety of not being able to be there at a moment’s notice.

That’s to say nothing of the financial stresses involved: Long-distance caregivers spend an average of $8,700 a year providing support to their loved ones, the NAC survey found — nearly twice as much as those who live closer. Travel accounts for most of the extra burden, but there are also expenses involved with hiring people and services in your stead.

Whether your parent could use a hand with housework or requires full-time care because of a disabling condition, you want to do all you can to help. But there are only so many plane tickets you can buy without compromising your financial goals; only so often you can abandon your own household or your job.

These strategies can help reduce the stress without sacrificing quality of care.

Know Mom’s Needs
It’s tough to figure out exactly what your parents need when you’re far away. So glean what you can when you visit: Is there a stack of unopened bills on the counter? Is there food in the fridge that’s well past its expiration date? Is Dad unsteady on the stairs?

Then fill in as best you can with frequent phone check-ins. You might also use a free online video-chat service such as Skype. Video visits can help you spot a drop in weight or signs of confusion.

“You’re looking for significant changes from normal patterns,” says Donna Wagner, a gerontology professor at Towson University. (Don’t think Mom and Dad can manage the technology? New software called PointerWare and In-TouchLink simplify computer interfaces for the elderly.)

Breaking up with mom’s broker
Since you won’t be able to get a complete picture this way — Mom may try to hide frailties because she doesn’t want you to worry or because she’s afraid of losing her independence — you’ll also want to assemble a team of local folks who can alert you to changes in your parent’s behavior or health.

Exchange numbers with Mom and Dad’s best pals; ask them to contact you if they notice anything unusual. Also, time your next visit to coincide with a primary care doctor’s appointment; that way, you can introduce yourself and get your parent to sign a HIPAA consent form, which allows the doc to share diagnosis and treatment information with you.

Once you determine that assistance is needed, broach the issue gently with your parent, framing it as a concerned observation about a challenge he is facing rather than your own fears.

You might say, “Dad, Uncle Walt noticed your fridge is empty. I wonder if we could do something to help you with grocery shopping?”

DIY Plan
If your parent just needs help with chores, errands, and the like, you may be able to put together a piecemeal care plan that costs nothing. Talk with family and friends who live nearer to your parents to see how they might be willing to help — whether it’s taking Dad to the doctor, having him over for meals, or doing his laundry.

Then figure out how you can assist from a distance. You may, for example, arrange for food deliveries from a grocery store or for a cleaning person to come weekly. You can also help your parent manage money, if that’s an issue.

You’ll eventually want a durable power of attorney, which authorizes you to make financial decisions on his behalf. But for basic bills, simply ask your parent to provide account numbers; then set up online access so you can automate payments and deposits. (If Mom and Dad don’t want you meddling, hire a daily money manager, who will do those tasks for $35 to $100 an hour.)

Coordinate everyone’s efforts via lotsahelpinghands.com, an invitation-only site that links your “team” to a common schedule, or via any other shared online calendar.

Get Low-Cost Help
Even with a solid network, you may have gaps you can’t cover. Fortunately, your local Agency on Aging can help you access a swath of services for the elderly, including food delivery and meal programs, transportation around town, social activities, help with tax prep, and more.

These community-based resources are usually free or cost very little — and some don’t have income or asset criteria. For information, call 800-677-1116 or contact your relative’s area Agency on Aging directly. Check with your employer too, says Wagner. Some large companies offer elder-care referrals through the benefits package or employee assistance program.

Bring on a Professional
If your relative requires more hands-on help than all these services provide, but isn’t ready yet to leave his or her home, you may have to hire an aide. A personal-care aide can provide help with cooking, light housekeeping, and bathing; a home health aide or visiting nurse may be more appropriate in situations where medical monitoring is needed.

The hourly rate for such services ranges from around $15 to $30, depending on the skills required. Visit Eldercare.gov for state and local resources, as well as checklists to use when hiring health workers or shopping for care facilities, should it come to that.

Seem like too much to manage from afar? Call in a geriatric-care manager, a certified professional who knows the local offerings and can help you assess your options, says Elinor Ginzler, a vice president at AARP and author of Caring for Your Parents.

Consultations run $100 to $200 an hour, but your employer may offer such assistance for free or at a discount. Even if you have to pay, it can be worth the investment: A care manager could prevent you from having to fly back and forth to manage the process yourself; plus, such people are trained to decode state and local benefits and Medicare rules, which could save you and your relative a lot of money.

In the end, it’ll be a relief to know that your parent is being well cared for.

Attention, Philanthropists: Your Tax Exemption Is at Risk

I found this Wall Street Journal article thought provoking. Leave a comment and let me know what you think.

If you are involved with a small charity or not-for-profit organization, take note: Only about six weeks are left for such groups to make an important tax filing—or risk losing their tax exemption.

Mark Matcho
Hundreds of thousands of small tax-exempt organizations must file a new form, called 990N, with the Internal Revenue Service by Oct. 15. The requirement applies to nearly all groups with annual gross receipts under $25,000.

The form—the IRS calls it an “e-postcard return”—is simple and must be filed online. It involves answering eight basic questions that give the organization’s name, address, principal officer and tax year, among other things.

There is a prominent link on the IRS home page (www.irs.gov), and the agency has even posted a YouTube video on the subject.

IRS Commissioner Douglas Shulman has been working to get the word out. “Please make sure your group files this simple form by Oct. 15,” he says. “The last thing we want is for worthy nonprofits to lose their tax exemption.”

Revoking Status
Mr. Shulman’s urgent plea has its roots in a 2006 tax change, when Congress asked the IRS to update its list of tax-exempt groups and track small groups in a way it hadn’t before. If a group doesn’t file the 990N form for three consecutive years, its tax-free status is automatically revoked.

The original deadline for most small charities to file was this past May 17, but IRS officials have extended it to Oct. 15. In late July, they posted a list on the IRS website of 320,000 charities at risk of losing their exemption.

The list contains an astonishing array of groups—everything from the Alabama Square Dance Callers Association to the Wyoming Yellowstone Grizzly Foundation—and even includes two IRS employee organizations.

Agency officials are quick to point out that some groups on the list may be defunct or operating under other names. Or, as with dozens of chapters of the large conservation group Ducks Unlimited, they may actually be part of one large group filing.

Some experts are concerned, however, that the list actually excludes a large number of groups in danger of losing their status. Often these are so small—under $5,000 in annual gross receipts—that they have never before needed to have any contact with the IRS.

“I’ve helped many small community groups, from cancer-awareness walks to snowmobile clubs, that had no idea they were subject to the new rules,” says Eve Borenstein, a nonprofit attorney in Minneapolis.

After the Oct. 15 deadline passes, the IRS will compile a list of organizations that have lost their exemption and publish it next year. Until a group receives a formal notice of revocation, donors can deduct allowable contributions.

***
Good news for generous credit-card holders who receive cash-rewards incentives: The IRS has recently ruled it is possible to take deductions for cash rewards given directly to a tax-exempt group.

“This is a win/win for donors,” says Melissa Labant, a tax expert with the American Institute of CPAs, since they can take a donation without claiming income. The cash reward qualifies as a rebate, which in tax terms is a reduction in the price of items purchased with the card.

The IRS recently published its position in Private Letter Ruling 201027015. Technically, such rulings apply only to one taxpayer, but experts consider them a good indicator of IRS thinking.

Donation Programs
Credit-card issuers who have donation programs for cash rewards are pleased with the ruling. A spokesman for Discover Financial Services says it now has six charitable partners, including the Red Cross, Make-A-Wish Foundation and World Wildlife Fund, and that its cardholders contributed more than $3 million of cash rewards to Haitian earthquake relief.

Meanwhile, Citizens Financial Group allows holders to use rewards to give in $50 increments to more than 100 tax-exempt groups.

The IRS ruling means there may be a sharp difference between cash-reward cards and “affinity cards” that benefit a university or charity. Holders of affinity cards don’t get deductions for benefits to the group, whereas those who contribute their cash rewards may qualify for them.

There is one caveat: The IRS said it would deny the deduction unless the donor letter confirming the gift strictly met all legal requirements, which include giving the day the contribution is made as well as the year. “The shows what a stickler for detail the IRS has to be when it comes to donations,” Ms. Labant says.

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