Thursday September 28, 2023
Secure 2.0 Act Increases Retirement Accounts
- Required Minimum Distribution (RMD) — Starting on January 1, 2023, the age for RMDs increased from 72 to 73. This enables individuals who have other savings or income to allow their retirement accounts to grow until they reach age 73. They will be required to start their distributions by April 1 of the following year. The RMD age will increase again to age 75 on January 1, 2033. An additional benefit is that RMDs are not currently mandated for Roth IRA accounts. Starting in 2024, there will be no RMDs for Roth 401(k) accounts.
- Increased Catch-Up Contributions — Individuals over age 50 are permitted to make additional contributions to their traditional IRA or Roth plan. The additional IRA contribution limit is $1,000, but the 401K catch-up contribution limit was $6,000 for 2022. This increased to $6,500 for 2023. Starting in 2025, employees who are 60 through 63 years of age will be able to make increased catch-up contributions of up to $10,000 each year. This $10,000 amount is indexed for inflation starting in 2026. The larger contributions for these four years will substantially increase retirement plans prior to the time for retirement payouts.
- Delayed RMDs with Part-time Work — An individual who works part-time may delay distributions from the company-sponsored qualified retirement plan if he or she is not a 5% or more owner of the business. The IRS has not defined the "still-working" standard with a minimum number of hours per week, so as long as the employer is willing to continue the individual as an employee, the deferral of RMDs is permitted. The IRS states that the RMDs are delayed until April 1 of the year after "the calendar year in which the employee retires." Because there is no specific hourly requirement, so long as the employer and employee agree that the individual is "still employed," the deferral should qualify.
If an individual has been able to pay off his or her auto, credit card and mortgage debt by retirement, he or she may have sufficient savings and other income to delay withdrawals from a retirement plan. This may permit a substantial increase in the plan. If an individual with a $1 million plan at a starting distribution age of 73 is able to delay taking RMDs until age 78, the plan balance could increase by 36% compared with the normal balance after distributions. The assumption is based on total earnings of 7.5% on the plan balance and a contribution of $15,000 into the plan each year.
Many individuals are now planning to work past age 70. A survey indicated that 37% of workers would be interested in working at least part-time after age 70. The other benefit of working is that the individual has additional income that may be contributed each year to the company 401(k) plan.
The still-working exception applies only to the qualified plan of the employer. If the employee has IRAs or 401(k) plans from another employer, those RMDs will be mandated. However, some employers may be willing to permit an employee to work part-time and roll over the other qualified plans into the company's 401(k) plan. This may enable an employee to delay RMDs on all of his or her retirement plans.
AICPA Frequently Asked Questions (FAQs) on Digital Assets
On February 17, 2023, the American Institute of CPAs (AICPA) submitted proposed FAQs to the Internal Revenue Service (IRS) related to digital assets.
The 2022 IRS Form 1040 includes a digital asset question on page 1. The new form no longer asks about virtual currency (as the 2019 through 2021 Forms inquired), but instead asks, "At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"
The digital asset definition is also expanded, "Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins."
The AICPA recommended FAQs for the IRS website. A concise restatement of the recommended FAQs is included here as a service to our readers:
- Digital Representation of Value? Answer: Any intangible assets that are capable of being stored on a computer that could be converted to U.S. dollars.
- What is a Cryptographically Secured Distributed Ledger? Answer: A type of data storage and transmission file which uses cryptography to allow for a decentralized system of verifying transactions.
- Is My Digital Asset Recorded? Answer: It is recorded if on a cryptographically secured distributed ledger and if it can be transferred by the ledger's protocol.
- Characteristics of a Digital Asset? Answer: Any digital assets that are a representation of value recorded on a cryptographically secured distributed ledger.
- Gifted Digital Assets? Answer: A gift of digital assets is not taxable. It also is not required to be reported on IRS Form 1040.
- Digital Asset Award or Payment? Answer: A digital asset is taxable if received as wages, paid for performance of tasks, received from a hard fork or air drop or for holding an NFT.
- Tax Consequences from Digital Asset Transactions? Answer: Receipt of digital assets as a reward, award or payment for goods will represent taxable income.
Debate Over Syndicated Easement Proposed Regulations
Following the decision by the Tax Court in Green Valley Investors LLC v. Commissioner, 159 T.C. No. 5 that invalidated IRS Notice 2017-10 as violating the Administrative Procedure Act, the IRS issued proposed regulations (REG-106134-22). The proposed regulations have resulted in multiple comments submitted to the IRS.
The majority of the comments questioned the decision of the IRS to issue proposed regulations that create a listed transaction status for syndicated conservation easement partnerships. The IRS indicated that it is taking the position that Notice 2017-10 (which created listed transaction status for syndicated conservation easement partnerships) is still valid, but it stated that it issued the proposed regulations "to eliminate any confusion and to ensure that these decisions do not disrupt the IRS's ongoing efforts to combat abusive tax shelters throughout the nation."
The proposed regulations create a four-part test where if (1) the taxpayer receives promotional materials that offer a contribution deduction over 2½ times the investment, (2) the taxpayer invests in a passthrough entity, (3) the passthrough entity contributes a conservation easement to a qualified exempt organization and allocates the charitable contribution deduction to partners and (4) the taxpayer claims the charitable contribution deduction. If all four elements are met, then the listed transaction status applies.
Critics of the proposed regulations emphasized that Congress included the Charitable Conservation Easement Program Integrity Act (CCEPIA) in the Consolidated Appropriations Act of 2023. Because CCEPIA now is effective and the 2½ times rule applies, the critics claim the proposed regulations are not required.
The Partnership for Conservation claims that "as a practical matter, the vast bulk of the conservation easement donations that would be treated as listed under the proposed regulations would be totally nondeductible under the new statute." It also points out that the proposed regulations do not include some of the CCEPIA exceptions for contributions made after a three-year holding period, made by family partnerships and conservation easements on certified historic structures.
The National Taxpayers Union's comments that the proposed regulation provisions have become moot and that "this proposed rulemaking should be withdrawn, and a more surgical approach reissued in a manner in concord with the new statute."
An opposing view is held by the Land Trust Alliance. It supports CCEPIA and the proposed regulations. The Land Trust Alliance stated, "In case promoters continue to create and market abusive syndicated conservation easement transactions, or challenge provisions of the Integrity Act, it is prudent for the IRS to codify in regulations the provisions of the Listing Notice. This will allow the IRS to continue to readily discover whether abusive transactions continue and to identify the promoters, material advisors, investors and donee organizations that continue to be involved."
Editor's Note: This debate will continue, and the IRS claims it will pursue the perceived abusive conservation easement syndicated transactions in Tax Court. The IRS's disclosure requirements have revealed there has been a small number of qualified organizations who have facilitated abusive syndicated conservation easement transactions.
Applicable Federal Rate of 4.4% for March -- Rev. Rul. 2023-5; 2023-10 IRB 1 (15 February 2023)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2023. The AFR under Section 7520 for the month of March is 4.4%. The rates for February of 4.6% or January of 4.6% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.