Tax-Free Distributions From IRA to Charity


The recently signed 2010 Tax Relief Act extended the availability for taxpayers who are receiving required minimum distributions (RMDs) from an IRA to contribute that amount to a charitable organization. The extension applies to contributions of distributions for all of 2010 and 2011. Also, RMD distributions to a charity can be made in January 2011, and elected to be treated as an RMD for 2010.

Where you hold an investment matters !

You’ll probably be reviewing your investment portfolio at year-end for tax and rebalancing purposes. As part of your review, check to be certain you are holding your specific investments in the right type of account. Your goal is to hold investments that produce ordinary taxable income in tax-deferred accounts and to hold those that produce tax-free or tax-favored income in your regular taxable accounts.

Consider this situation. If you hold tax-free municipal bonds in a tax-deferred retirement account, you are “sheltering” interest income from taxes that never would be taxed in the first place. Withdrawals from the retirement account will be taxed as ordinary income at ordinary income rates, and that includes interest from the municipal bonds. The result is that normally tax-exempt earnings eventually become subject to income tax.

Another example: Long-term capital gains are taxed at lower rates than interest income. So investments generating interest might be better held in retirement accounts, while investments generating capital gains might be better held in taxable accounts. Remember, withdrawals from retirement accounts (other than Roth IRAs) are taxed at ordinary income rates even if the income comes from long-term capital gains.

Tax-deferred retirement plans should outperform an investment account that is exposed to annual taxation. But if you’re not careful where you hold specific types of investments, you could end up with less rather than more income.

Taxes are Not Increased for Next Year

Congress passed the most far-reaching tax bill in a decade late Thursday, averting across-the-board tax increases, enacting new breaks for individuals and businesses.

 The House of Representatives on Thursday  passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, The bill now goes to President Barack Obama for his signature, which is expected soon.

The bill has provisions covering the estate tax, expiring tax cuts, expired tax provisions and an alternative minimum tax (AMT) patch. 

The bill postpones the scheduled sunset of the lower tax rates introduced in 2001 by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, PL 107-16); those rates will now continue through 2012. The bill also continues the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (PL 108-27) through 2012. 

For 2011 only, the bill reduces the rate for the Social Security portion of payroll taxes to 10.4%, by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remains at 6.2%).

 The bill includes an AMT patch for 2010 and 2011. For 2010, the AMT exemption amounts will be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts will be $48,450 and $74,450, respectively. 

The bill extends the 100% bonus depreciation for business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012. 

The bill temporarily reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011). 

The bill also extends a large number of expired or expiring provisions, including: 

  • The increased standard deduction for married taxpayers filing jointly, scheduled to expire after 2010, would continue for two years;
  • The $1,000 child tax credit amount would continue for two years, instead of reverting to $500;
  • The $3,000 amount for the child and dependent care credit, which is scheduled to revert to $2,400 after 2010, would continue for two years;
  • The American opportunity tax credit would continue for two years;
  • The temporary 100% exclusion of gain from the sale of certain small business stock under IRC § 1202, enacted by the Small Business Jobs Act of 2010, would be extended through 2011.

IRS has 164 million waiting for you!

Are you still waiting for your 2009 tax refund? If so, you may be one of the 111,893 taxpayers to whom the IRS has been unable to deliver a refund check. The refunds total about $164 million.

Every year there are taxpayers who don’t update the IRS or the U.S. Postal Service when they move or change their mailing address. Checks are mailed to the last known address for taxpayers, and when the address isn’t current, the checks are returned as undeliverable.

To check on a missing refund, you can go to the IRS Web site at and use the “Where’s My Refund?” tool. A reminder: The IRS doesn’t contact people by e-mail regarding pending refunds. So if you receive such an e-mail, it’s likely to be an identity theft scam. To check on a refund by phone, call 1-800-829-1954.

IRS issues energy reminder

The IRS recently issued a bulletin reminding taxpayers that making energy-saving improvements to their homes before the end of the year can lower their taxes for 2010.

The credit allows you to claim up to 30% of the cost of energy-efficient windows, doors, certain roofs, high-efficiency heating and air conditioning systems, water heaters, and other energy-saving improvements to your principal residence. The maximum credit for amounts spent in 2009 and 2010 is $1,500.

A second energy credit is available to encourage investment in alternative energy equipment such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.

The IRS cautions homeowners to check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s website or with the product packaging. Not all energy-efficient improvements qualify for the tax credits. The manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits.