Distributions From Inherited IRAs

In the world of finance, the 10-year rule on inherited IRAs has become a significant point of discussion, particularly for those planning their estates or beneficiaries inheriting retirement accounts. An inherited IRA is a retirement account that a beneficiary receives after the original owner’s passing. Traditionally, beneficiaries had the option to stretch withdrawals from these accounts over their lifetime, but the Secure Act, passed in 2019, brought significant changes including introduction of the 10-year rule.

The 10-Year Rule

This rule mandates that non-eligible designated beneficiaries of inherited IRAs must withdraw the entire balance of the account within ten years of the original owner’s death. However, eligible designated beneficiaries are still allowed to stretch the IRA and take distributions based on their life expectancy.

The IRS defines an eligible designated beneficiary as someone who meets one of the following requirements:

  1. Spouse or minor child of the deceased account holder.
  2. Disabled or chronically ill individual.
  3. Individual who is not more than ten years younger than the IRA owner or plan participant.

RMD Rules

A main concern many beneficiaries have regarding inherited IRAs relates to the Required Minimum Distribution (RMD) rules. The IRS issued proposed regulations in 2022 which clarified that there are indeed two sets of rules beneficiaries must follow with IRAs inherited in 2020 or later. The rules are the 10-year rule and the annual RMD, meaning beneficiaries need to take distributions out each year in the 10-year window. IRAs inherited before 2020 can be stretched and distributed over the beneficiary’s life expectancy.

Due to confusion on the regulations, the IRS has granted penalty waivers each year for beneficiaries who did not take an RMD during 2020-2023. The IRS announced this past April that they are also waiving the penalty for 2024 RMDs. If someone has already taken their RMD in 2024, the distribution cannot be redeposited into the inherited IRA.

Even though there is not an RMD requirement in 2024, beneficiaries should consider taking a distribution out this year to spread out the income being reported on their tax return over multiple years. Waiting and taking a lump sum distribution in the last (tenth) year could be enough to jump into a higher tax bracket!

Reach out to your tax advisor at KT to discuss your best options to minimize tax on an inherited IRA distribution.

June 17, 2024

Considerations in Negotiating and Drafting Gift Agreements

A gift agreement is highly recommended for a person desiring to create a legacy gift in their estate plan for their family while also providing assistance to a public charity.  It is not a legal requirement in order to make a gift.  A gift takes place as soon as a donor transfers ownership of property to a charity without consideration.  This can be in the form of cash or even noncash items.  A donor should consider a gift agreement if they have a large complex gift, if the donor has restrictions on the gift or if the funds will be received by the charitable organization at a later date.  In these situations, the agreement is necessary to ensure the donor’s promise can be relied upon, set expectations of donor and donee and prevent any misunderstanding of the terms of the gift. 

When working with a gift agreement it is important to distinguish if the donor has a gift agreement or a pledge agreement as they are often used interchangeably, especially when a current gift includes a pledge to make a future contribution.  A gift agreement documents a gift has been made by the donor to a charitable organization and is legally enforceable.  A pledge agreement records a commitment by a donor to make a gift at a future time.  It is generally not enforceable by law unless two elements have been met: there has been consideration given to the donor and the charity can establish that it has detrimental reliance on the pledge.

There are several items that should be included or considered when creating a gift agreement.  Below is a list of some of those items:

  1. Legal name of the charity
  2. Legal name or names of the donors.  For a married couple it is important to identify if the gifts will be given jointly or by only the husband or wife. 
  3. Detailed description of exactly what is to be contributed and the dates on which it will be contributed.  This could include the amount of cash, specific securities, or legal description of real estate.  The donor should consult with their CPA on which assets are the best to gift to a charity.
  4. State that the donor’s gift is unconditional and irrevocable, and the designation of the charitable organization is irrevocable.  The donor can retain the right to change which nonprofit organization the donation goes to. 
  5. Statement that if the donor passes away prior to the fulfillment of the promise to give, the donor intends, and hereby instructs his or her personal representative to fulfill the promise.
  6. Identify if the gift is unrestricted or restricted.  If restricted there needs to be a statement for what the gift will be used for and the time period when the gift will be expended.  If the gift is permanently restricted for endowment, there should be a statement as for what the earnings may be used for and when they can be used. 
  7. Statement describing any other restrictions or terms that have been agreed upon by the donor and the charity. An example of this is if a donor wants to donate money to start a fundraising drive at the charity.  The donor can state they will donate a certain dollar amount if the charity can raise matching funds over the next 5 years.  If the charity does not raise the matching funds than the portion that is unmatched could be given back to the donor’s advised fund and donated to another charity. 
  8. Signatures of each donor and an authorized representative of the nonprofit organization.

The more precise the gift agreement is the less likely there will be any misunderstandings of the intentions of the donor and donee.  Above is only a small list of items to consider.  It is not intended to be comprehensive, nor does it constitute legal advice.  It is recommended to seek legal counsel when entering into legal agreements.  

December 7, 2020

Tax Credit Businesses Might be Missing

When business owners hear “Work Opportunity Tax Credit” (WOTC) most think right away they only qualify for this credit if they hire ex-felons or veterans.  However, this is not the case.  In addition to the traditional categories for the WOTC, a new hire qualifies just by living in a county that is identified as a rural renewal county.  The business does not need to be located in the county, the qualification is based on where the employee lives.  A rural renewal county is a county in a rural area that lost population during the 5-year periods 1990 through 1994 and 1995 through 1999.  For South Dakota the following counties qualify as a rural renewal county:  Aurora, Campbell, Clark, Day, Deuel, Douglas, Faulk, Grant, Gregory, Haakon, Hand, Harding, Hutchinson, Jones, Kingsbury, Marshall, McPherson, Miner, Perkins, Potter, Sanborn, Spink, Tripp, and Walworth.  There are counties in over 30 states that qualify for this credit.

To qualify for the credit, you have to follow several rules.  First, on the day the new hire accepts a job offer, they will need to complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit.  This completed form will need to be sent to the South Dakota Department of Labor. The State uses this form to certify the new hire is a member of a targeted group for purposes of qualifying for the work opportunity credit. The State will not accept the applicant if the employer waits and completes the form on the first date of employment.  Second, the employee needs to be between the ages of 18 and 40, needs to work at least 120 hours from now through 12/31/19 for the business, and the employee cannot be a dependent or relative to the business owner.  The credit is calculated on form 5884 and filed with the federal income tax return for the business.  If the business is an S corporation or partnership, the credit will flow through on a K-1 and be taken on the owner’s individual tax return.

Now that you know the rules, what is the benefit?  If the employee is paid at least $6,000 of qualified wages and works at least 400 hours, the employer can get a $2,400 credit.  The credit is reduced if the employee has less than 400 hours or less than $6,000 in wages.  A perk to this credit, there is no cap on the number of eligible people an employer can hire or amount of tax credits that can be claimed each year.

Please consult with your Ketel Thorstenson tax professional if you have questions on the credit.

 

January 14, 2019

2017 Tax Cuts and Jobs Act Concerning Estate Tax Exemption

President Donald Trump’s vow to repeal the federal estate tax did not happen with the 2017 Tax Cuts and Jobs Act that was signed into law the week before Christmas.  Instead the federal estate tax exemption has doubled, which benefits high-net worth families.  Before we go into the specifics of the law, let’s first define the Federal Estate Tax.  This is a tax on property (cash, real estate, stock, or other assets) at death transferred from a deceased person to an heir, other than a surviving spouse.  Currently, only individual estates with total assets above the Exclusion Amount (currently $5.49 million) are subject to the estate tax.  The current estate tax rate is 40%.

The new Act has doubled the basic exclusion amount from $5.49 million per individual to $11.2 million for estates of decedents dying (and gifts made) after 2017 and before 2026.  The $11.2 million exemption is indexed for inflation.  At 01/01/2026, the exclusion amount is set to sunset back to the $5.49 million per individual, subject to inflation.   The tax rate remains at a flat 40% under the new law.

If the first spouse to die uses his or her exemption by passing wealth to heirs, or if portability is elected, the surviving spouse could have a $22.4 million estate exemption at the time of his or her death, as long as death occurs prior to 2026.  The portability election is an election that allows a surviving spouse to use a deceased spouse’s unused estate tax exclusion amount for estate tax at his or her death.   Even fewer estates will be subject to the estate tax with the higher exemption and the portability election.

For wealthy taxpayers, one option for anyone who does not plan on dying before 2026 (isn’t that everyone?), is to make gifts anytime between 2018 and 2025 to use up their exclusion.  This is a way to decrease their estate and be able to utilize the increased exemption before it reverts back to $5.49 million. Because this law “sunsets” on January 1, 2026, wealthy people will need careful planning, now and when the sunset date nears.   Also, since this was not a bi-partisan tax bill, it is always possible that a new election might bring new laws even before then.

On the other hand, it is often an “income tax” mistake to make large lifetime gifts, due to the loss of step-up in basis.   Step-up in basis occurs when a taxpayer passes away as almost every asset owned receives a new income tax basis, which is based on the fair market value at the date of death.  This can be very beneficial for the heirs of farmers/ranchers or other taxpayers who have property with a very low cost basis, such as land.  For example, the stepped-up basis reduces an heir’s capital gain when the asset is sold.  Also, stepped-up business assets, such as breeding stock, can be re-depreciated over their useful lives, possibly saving income tax dollars for the recipient.

Please contact our office if you have any questions on estate tax.

January 3, 2018

Changes to Filing Late Portability Elections

Portability has become an important tool for most couples when it comes to estate planning.  The portability election first came into play by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This election allows a surviving spouse to use a deceased spouse’s unused exclusion amount for gift tax during his or her lifetime and for estate tax at death.  For 2017 the federal estate tax exclusion amount is $5,490,000.  Since each spouse has his or her own exclusion, portability allows couples to exempt up to $10,980,000 in assets from the estate tax.  In order to “port” over the unused exclusion from the first deceased spouse, a Form 706 has to be timely filed, which is 9 months after date of death or if extended, an additional 6 months is allowed to file the return.  If the return is not filed within this time frame, executors have to file a request or a letter ruling to obtain the exemption.  This letter ruling can be very costly.

On June 9, 2017 the IRS provided a more permanent, simplified method for making a late portability election.  Now the estate executor must:

  1. File a Form 706, estate tax return, on or before the latter of January 2, 2018 or the second anniversary of the decedent’s date of death.
  2. State on the top of the form that the return is “filed pursuant to Rev. Proc. 2017-34 to elect portability under section 2010(c)(5)(A)”.

If the return is filed after this date, the executor has to file a private letter ruling and pay a fee of $10,000.

The simplified method is allowing executors of anyone who passed away after December 31, 2010 to now file a Form 706 to “port” over the spouse’s unused exclusion amount to the surviving spouse.  This new procedure does not apply to taxpayers who already filed an estate return within the allowed time for electing portability or to those who opted out.

It is good to keep in mind the portability election is not without some negative attributes.  By making the portability election at the death of the first spouse, the statute of limitations does not close on the first spouse’s estate until the death of the surviving spouse.  This gives the IRS the ability to re-examine any issue in the estate of the first spouse.

Also, if the decedent lives in a state which has state inheritance tax, the exemption for that state may be less than the federal exemption.

Please contact the portability experts at KTLLP if you have any questions or need help filing a Form 706.

September 20, 2017

John Thune’s (Invest) Act of 2017

In May John Thune introduced a bill to reform key parts of the tax code and is a significant component of the overall tax reform package.  The bill is intended to foster new business formation and help existing businesses expand their operations, create new jobs, and fuel greater economic growth.

Below is a summary of some key points:

  1. Increase section 179 expensing limit to $2 million and starts phasing out the benefit when total purchases are over $3 million. Currently businesses can only expense $500,000 in 2017.
  2. Section 179 would apply to wider range of property and equipment – HVAC units and property used in rental real estate.
  3. Reduce depreciable life for farm machinery and equipment from 7 years to 5 years.
  4. Allow small to mid size businesses to expense cost of inventory immediately rather than waiting until the inventory is sold
  5. 50% bonus depreciation on new qualified property is made permanent
  6. Increase the direct write-off of start-up and organizational expenses from $5,000 to $50,000. Additional costs over the $50,000 would be depreciated over 10 years instead of 15 years.
  7. For a passenger vehicles under the 6,000lb limit the bill increases the amount a business can deduct to $50,000 over 6 years instead of the current $16,935 limit. Businesses could use the 50% expensing or bonus depreciation in the first year up to $25,000.
  8. Allows business to depreciate intangible property over 10 years instead of 15 years.

We will keep an eye on this bill and see if or when it will be passed.

June 14, 2017

Tax Tips for Farmers and Ranchers

Michelle-Minnerath-headshotThis year has been tough on many farmers and ranchers in South Dakota due to the lack of moisture and the hail storms that have went through the region. Many ranchers have decided to sell down their herd due to lack of pasture, water, and hay.  The IRS assists these taxpayers by providing a few deferral options.  The first option requires the taxpayer live in a persistent drought area reported by the U.S. Drought Monitor and they had to sell breeding livestock due to the weather conditions.  Contact Ketel Thorstenson to find out which counties qualify for the deferral this year. This election allows the taxpayer non-recognition of gain from the sale of this breeding livestock where replacement property is purchased within applicable time guidelines.  The replacement period ends the first year after the first drought-free year for the region.  The second option allows ranchers who had to sell more animals than their usual business practice due to the weather related conditions, the ability to defer or postpone reporting the income from the additional animals for one year.  An example: If in prior years the rancher normally only sells steers and keeps the heifers for replacement but this year due to the drought the rancher sold all the steers and the heifers.  The rancher would be able to defer in this situation the income from the sale of the heifers for one year.

The new overtime rules going into effect December 1, 2016 has been all over the news. We have had many calls from our agriculture communities asking if they have to follow the new rules.  The answer to that is very often no they do not. Any employer in agriculture who did not utilize more than 500 “man days” of agricultural labor in any calendar quarter of the preceding calendar year is exempt from the minimum wage and overtime pay provisions of the Fair Labor Standards Act for the current calendar year. A “man day” is defined as any day during which an employee performs agricultural work for at least one hour. However, farmers and ranchers that have employees do need to keep track if they are required to file state and federal unemployment reports. They are required to file if they paid wages of $20,000 or more to employees during any calendar quarter in 2016 or if they employed 10 or more employees during any 20 or more calendar weeks in 2016. Be careful on planning year-end bonuses because this is included in wages and could cause wages to go over this limit.

Please contact your KT representative with any questions you might have concerning the deferral options or the payroll issues that were discussed.

September 30, 2016

Changes for Social Security in 2016

In the pastMichelle-Minnerath-headshot married individuals were able to utilize certain advantages in order to maximize their retirement benefits.  The Bipartisan Budget Act of 2015 was passed last November to change these rules.

One of the best ways to increase your Social Security retirement benefits is to delay receiving them until age 70.  Each month you delay receiving them from age 62 to age 70 results in a higher monthly lifetime retirement benefit.   Prior to the change in the law it allowed married individuals to increase their total social security benefits by allowing one spouse to receive spousal benefits, while letting his or her own retirement benefits grow until age 70, which at that time the individual receiving the spousal benefits would switch and start taking his or her own larger retirement benefit.  Under the new law if the spouse turns 62 on or after January 1, 2016 and is eligible to receive his or her own retirement benefits and spousal (or divorced spousal) benefits at the time of application, then the spouse is “deemed filing” the application for both benefits and will receive the higher of the two amounts.  The spouse will no longer be able to apply for only the spousal benefits and then apply for his or her own retirement benefits at a later date.   Individuals who were 62 before January 1, 2016 and are already receiving spousal benefits are grandfathered in and can still switch over to their own benefits when they reach age 70. This law does not apply to survivor benefits.   Individuals may apply for survivor benefits early and then switch over to their own benefits on or before age 70.

The other law individuals utilized in the past was the ability for an individual to apply for social security benefits in order for their spouse to start taking spousal benefits.  The individual would then suspend his or her benefits in order to increase the monthly payments until age 70 but the spouse was still able to receive his or her spousal benefits.  Under the new law if the individual requests for voluntary suspension of benefits after April 30, 2016, the spousal benefits will be suspended for the spouse as well.  Taxpayers whom submitted a request for voluntary suspension before April 30, 2016 will not be affected by the new law.   There are a few exceptions to this rule.  One is if the taxpayers are divorced, the divorced spouse can still receive the spousal benefits even if the ex-spouse voluntarily suspends his or her retirement benefit.  Other exceptions apply when the individual receives spousal benefits and is also entitled for disabilities.  Individuals should contact the social security administration to go over the exceptions.

Determining when to start taking Social Security benefits is a complex and personal decision.  Please contact your KT representative with any questions when making this decision.

 

June 8, 2016