In IR-2023-246, the Internal Revenue Service (IRS) reminded individuals born before 1951 to take a required minimum distribution (RMD) from their IRA or other qualified retirement plan. The first RMD may be taken in 2023 or until April 1, 2024.

Individuals born before 1951 turn age 73 in 2023. The Secure 2.0 Act raised the RMD age from 72 to 73. Those individuals who were born during 1951 must take their first required distribution by April 1, 2025.

The IRS reminds owners of IRAs and other retirement plans that there are several different types of plans and different rules for those individuals.

1. IRA Owners — The basic rule for an IRA owner is that under Secure 2.0 Act rules he or she must take an RMD every year after reaching age 73.

2. Roth IRA Owners — Those individuals who own a Roth IRA have contributed after-tax dollars to the Roth. They eventually will be able to withdraw the contributions and earnings tax free. Roth IRA owners are not required to take an RMD during their lifetime. They may allow the Roth to grow tax-free until they pass away.

3. Qualified Retirement Plans — There are a multitude of employer-sponsored retirement plans. These may include profit-sharing plans, 401(k) plans, 403(b) plans or 457(b) plans. Most participants in employer-sponsored retirement plans can delay RMDs until they retire. The exception is an individual who is a 5% or more owner of the business. Even if a business owner is still working, RMDs must start at age 73.

4. 401(k) or 403(b) Roth Plans — Some individuals have an employer who allows their voluntary contributions to be allocated to a Roth plan through a 401(k) or 403(b) account. These plans will require an RMD for 2023. However, in 2024 and later years the 401(k) or 403(b) Roth plans will not require an RMD.

The IRA trustee or administrator is required to calculate and report the RMD to each IRA owner. The individual who owns multiple IRAs must calculate a total RMD but may withdraw that amount from any of the IRA accounts. The IRA trustee or administrator may calculate an RMD, but the account owner is responsible for taking the correct amount.

Under Secure 2.0, the penalty for failure to take the full amount of the RMD is reduced from 50% to 25% of the amount not withdrawn. This can be reduced further to a tax of 10%, if the error is corrected within two years.

An individual who inherits an IRA will generally be subject to distribution requirements the year after he or she has received the account. For individuals who inherited in 2020 or later years, there is generally a requirement to fully distribute the account within 10 years of the death of the account holder. While the IRS has published a proposed ruling that suggested it may be necessary to take minimum distributions during the ten-year period, it has waived those distribution requirements for 2023.

There are four exceptions to the ten-year RMD rule. A surviving spouse, minor child, and disabled individual or chronically ill person may qualify for a different plan. The disabled or chronically ill individual may use the prior distribution-over-life-expectancy method.

There is further information on required minimum distributions and explanations on how to calculate the RMD for an inherited IRA in Publication 559, Survivors, Executors and Administrators.

JCT Explains IRA to Life Income QCD

The Joint Committee on Taxation (JCT) has finally released the "Blue Book" that explains tax provisions passed by the 117th Congress. The JCS-1-23 publication in Title III, Paragraph 7, explains the JCT interpretation of the qualified charitable distribution (QCD) to life-income plans.

JCT notes the $100,000 QCD for a gift directly from an IRA to a qualified nonprofit will be indexed. The $100,000 direct IRA charitable rollover will increase to $105,000 in 2024. Similarly, the $50,000 IRA to life-income rollover is increased to a one-time election QCD of $53,000 in 2024.

An individual in 2023 may elect to distribute $50,000 through a one-time election to transfer from an IRA to a split-interest entity. The split-interest entity may be a charitable remainder annuity trust (Sec. 664(d)(1)), a standard charitable remainder unitrust (Sec. 664(d)(2)) or an immediate charitable gift annuity (Sec. 501(m)). The trust or annuity must be funded only by a QCD. A gift annuity must have a minimum payment of 5% and is required to make the first payment within one year.

The charitable remainder annuity trust or charitable remainder unitrust qualifies only if the entire value of the remainder interest would be a qualified deduction under Sec. 170. A charitable gift annuity is qualified for the one-time election if the charitable value would also qualify for a deduction under Sec. 170.

The life-income agreement is qualified if the IRA owner, IRA owner’s spouse or IRA owner and spouse are the trust income or annuity beneficiaries. The income interest in the split-interest entity must also be nonassignable.

All distributions from the charitable remainder unitrust or annuity trust will be treated under Sec. 664 as Tier I ordinary income. Because there is no investment in the contract under Sec. 72(c), all payments from the gift annuity will also be ordinary income.

Editor's Note: The JCT explanation is helpful, but fails to answer one question. When the initial IRA rollover (QCD) was passed in 2006, the JCT stated that the distribution would qualify for the RMD. JCT Technical Explanation of PPA 2006 (JCX-38-06) states on page 266, "Qualified charitable distributions are taken into account for purposes of the minimum distribution rules applicable to traditional IRAs to the same extent the distribution would have been taken into account under such rules had the distribution not been directly distributed under the provision." The 2023 JCT explanation does not discuss the QCD issue. Some tax advisors may take the position that the prior determination that the QCD qualifies for the RMD also applies to the split-interest QCD. While this is a reasonable position, JCS-1-23 does not specifically address the QCD and RMD issue.

JCT Explains Limits on Charitable Conservation Easements

The Joint Committee on Taxation (JCT) published the "Blue Book" and discussed the new charitable conservation easement rule that applies to partnerships. The JCS-1-23 publication in Title VI, Paragraph 5, explains the JCT interpretation of syndicated conservation easement gifts.

If a partnership is involved in transferring a conservation easement to a qualified nonprofit, the deduction is limited to 2½ times the sum of the relevant basis. The partner's adjusted basis is generally determined prior to the contribution, which disregards Sec. 752 with respect to certain liabilities and may include other basis adjustments as determined by the Secretary of the Treasury.

There are three exceptions to the disallowance rule. First, contributions made after a three-year holding period will be qualified. The three years are based on the latest of the last date on which the partnership acquired the real property, the last date on which any partner acquired an interest in the partnership and the last date on which any partnership acquired an interest in the donating partnership.

The second exception is for family partnerships. A partnership which is substantially owned by a family described in Sec. 152(d)(2)(A) through (G) avoids the disallowance rule. Third, there is a separate rule that applies to certified historic structures under Sec. 170(h)(4)(C).

There are changes in accuracy-related penalties and the statute of limitations. The Sec. 6662 accuracy-related penalty for any disallowance will be treated as a gross valuation misstatement. This increases the penalty from 20% to 40% of the underpayment in tax. It also eliminates a reasonable cause defense. In addition, there is no specific requirement for supervisory approval under Sec. 6751(b). The statute of limitations is subject to the listed transaction provisions. In some circumstances, the statute may be extended to one year after the disclosure by the partnership to the IRS that this is a syndicated conservation easement transaction.

Partners who give a contribution in a certified historic structure are also subject to new rules. The gift by a partnership under Sec. 170(h)(4)(C) may be limited to 2½ times each partner's relevant basis. The partnership must disclose on the tax return that it has deeded a conservation easement for a certified historic structure and comply with all IRS reporting requirements.

There is a provision in Secure 2.0 that requires the IRS to publish safe harbor deed language for extinguishment clauses and boundary line adjustments. After the date of publication, most donors have a 90-day period to amend and file new deeds. The amendment will relate back to the initial date of recording.

However, an amended deed is not available for many partnerships. If this is a reportable transaction under IRS Notice 2017-10, the easement is subject to the disallowance rule, a charitable deduction has previously been disallowed by the IRS, there is a case currently pending in Federal court, a penalty under Sec. 6662 or 6663 has been determined or a partner is in a judicial proceeding with a final judgment, the deed may not be amended. For all of these cases, the corrective deed safe harbor is not applicable.

The new provisions on syndicated partnership conservation easement deductions and the disallowance rule apply in 2023 and subsequent years.

Applicable Federal Rate of 5.2% for January — Rev. Rul. 2024-2; 2024-2 IRB 1 (18 December 2023)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2024. The AFR under Sec. 7520 for the month of January is 5.2%. The rates for December of 5.8% or November of 5.6% 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 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.”