Update on 2010 Charitable Contributions

Congress has passed the Haiti Charitable Deduction Bill (H.R. 4462) that permits taxpayers to make an election to deduct cash charitable contributions on their 2009 income tax return for Haiti relief donations made after January 11, 2010 and before March 1, 2010.  Normally cash donations are deductible in the tax year made.  Be sure to let your tax preparer know if you made a donation and would like to make the election.  You will need to keep track of these donations so that if the election is made, the deduction is not again claimed on your 2010 income tax return.  The election can make sense if your marginal 2009 income tax rate will be equal to or greater than your expected 2010 marginal income tax bracket.

Many taxpayers used the provision allowing individuals aged 70 1/2 and older to donate up to $100,000 from their individual retirement accounts (IRAs) and Roth IRAs to public charities without having to count the distributions as taxable income.  This provision expired on December 31, 2009.  The U.S. House passed a tax extenders bill on December 9, 2009 to extend this provision through 2010.  However, the U.S. Senate has not yet taken up a tax extenders bill.  Therefore, this popular provision is not currently available, but may be restored if the Senate acts upon it later this year.

Required Minimum Distributions Restart in 2010

Employer-sponsored defined contribution retirement plans (profit sharing plans, 401(k)s, etc.) and IRAs are subject to so-called, required minimum distribution rules.  The rules generally apply upon attainment of age 70 1/2 or after the death of the retirement account owner.  A 50% penalty of the RMD amount applies to failures to distribute the required amount.  The rules and penalty are designed to force out retirement savings so that they will be subject to income tax during the owner's retirement years and to prevent the use of retirement accounts solely as an inheritance vehicle.  The government enacted a one-year waiver of these rules for the year 2009 in response to the 2008 stock market crash.

Now that the waiver is over, what are the general implications for 2010?

• Those who attained age 70 1/2 prior to 2009:  use the account value as of December 31, 2009, the Uniform Lifetime Table factor for their attained age in 2010, and make the distribution no later than December 31, 2010.
• Those who attained age 70 1/2 in the year 2009:  use the account value as of December 31, 2009, the Uniform Lifetime Table factor for their attained age in 2010, and make the distribution no later than December 31, 2010.  The special rule that allows a deferral of the first RMD to April 1st of the calendar year following the year age 70 1/2 is reached does not apply.
• Those who attain age 70 1/2 in 2010:  regular RMD rules apply (including deferral of the first RMD to April 1, 2011) as the waiver has no effect.
• Beneficiaries using the five-year payout method:  the year 2009 is not counted as one of the five years.
• Beneficiaries using the lifetime payout method:  use the account value as of December 31, 2009 and apply the life expectancy factor from Single Life Table using the normal rules.

RMD rules can be quite complicated to apply and the one-year waiver for 2009 introduces some uncertainty into the process of restarting the RMDs in 2010.