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Monday November 11, 2024Washington NewsHow to Make an IRA Gift To CharityEach year the Internal Revenue Service (IRS) reminds owners of traditional IRAs who are over 70½ that they may make a charitable gift from a traditional IRA. The IRS refers to an IRA charitable rollover gift as a qualified charitable distribution (QCD). An added benefit for those who are age 73 or older is that a QCD may fulfill part or all of your required minimum distribution (RMD) for the year. It is helpful for owners of traditional IRAs to understand how to do a QCD, what is required to report a QCD on your tax return and the required information on your acknowledgment from the nonprofit.
Editor's Note: Many individuals will fulfill part or all their RMD this year through a gift to charity from a traditional IRA. It is best to start the gift process in November or early December. Some IRA custodians may take longer than expected to process the transfer. If a donor has the right to make distributions from his or her traditional IRA through a checkbook, it will be important to send the check directly to the charity. A donor must allow sufficient time for the charity to deposit the check and for the financial institution to process the check. This process must be completed by December 31, 2024 to qualify as an RMD for 2024. IRA and 401(k) Contributions in 2025In Notice 2024-80; 2024-47 IRB 1, the Internal Revenue Service (IRS) announced 401(k) and IRA contribution limits for 2025. The IRA limit remains $7,000 in 2025. Individuals age 50 or over may make a catch-up contribution of $1,000 for a total transfer of $8,000. Traditional IRA contributions from earned income are tax deductible. The traditional IRA has two main tax benefits – contributions are tax deductible and grow tax free. If you are covered by a qualified retirement plan at your workplace, the IRA deduction may be reduced or phased out.
A Roth IRA is funded with after-tax income. The Roth IRA grows tax free and distributions from a Roth IRA are usually tax free. Roth IRA owners may withdraw contributions tax free at any time. After the Roth IRA has been in existence for five years and the owner is over age 59½, amounts may be withdrawn tax free. The Roth IRA phase out limits will also increase in 2025.
Many businesses maintain a 401(k) plan, and most nonprofits provide a 403(b) plan. The 2025 limit for an employee contribution to a 401(k) or 403(b) plan is $23,500. Generally, employees over age 50 may make a catch-up addition of $7,500, for a total transfer limit of $31,000. An exception is available for employees aged 60 to 63, who may make a catch-up contribution of $11,250. If your employer offers both a traditional 401(k) and a Roth 401(k) plan, you may allocate your employee contribution to one or both funds. The traditional 401(k) amounts are deductible, but the Roth 401(k) contributions are after-tax. The IRA Charitable Rollover limit for 2025 will be $108,000. The 2025 IRA to Charitable Gift Annuity Rollover limit will be $54,000. Editor’s Note: Many employers match an employee’s 401(k) contributions. This is a good way to encourage employee participation in the 401(k) plan. The employer match is used to fund the employee’s traditional 401(k) account. The employee may still make contributions to a Roth 401(k) account up to the $23,500 or $31,000 limit. Tax Reform in 2025During November, the Senate Finance Committee and House Ways and Means Committee will start to plan for 2025. Since there are hundreds of provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) that sunset at the end of 2025, there will be a major tax bill next year. There are at least ten significant provisions that affect individual taxes that will be considered. With major tax legislation, there are likely to be compromises on many of these provisions.
Editor’s Note: It is possible that most of the current tax provisions will be continued. A major discussion will ensue on whether there should be offsets for the TCJA extensions. The estimated cost of extending all provisions is over $4 trillion in a decade. The tax bill will be an important debate in 2025. Applicable Federal Rate of 4.4% for November: Rev. Rul. 2024-24; 2024-45 IRB 1 (15 October 2024)The IRS has announced the Applicable Federal Rate (AFR) for November of 2024. The AFR under Sec. 7520 for the month of November is 4.4%. The rates for October of 4.4% or September of 4.8% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.” Published November 8, 2024
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