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Tax Law Update: November 2020

David A. Handler and Alison E. Lothes highlight the most important tax law developments of the past month.

• Guidance provided on charitable contributions from individual retirement accounts—Notice 2020-68 (the Notice) provides guidance in the form of questions and answers with respect to various provisions of both the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Miners Act.

One area of guidance that may be of particular interest to taxpayers and their advisors is the portion relating to certain charitable distributions from an IRA. Under Internal Revenue Code Section 408, up to $100,000 of direct transfers to a qualified charity from an IRA owned by a taxpayer over age 70½ are excluded from his taxable income. This is often more advantageous than receiving a taxable distribution and then contributing the proceeds to charity. In addition, these distributions (referred to as “qualified charitable distributions” or “QCDs”) also qualify as required minimum distributions.

Prior to the SECURE Act, an individual wasn’t permitted to make contributions to a traditional IRA after age 70½. However, the SECURE Act repealed that restriction under IRC Section 219 so that individuals can still make contributions to their IRA after age 70½.

However, those contributions will affect the amount of available QCDs in a given year. The Notice explains that the amount of a QCD for a given year is reduced by the portion of the transfer that’s attributable to deductible IRA contributions made by the taxpayer after age 70½ that year and any earlier taxable years in which the taxpayer was over age 70½. The result is that QCDs from an IRA that receives such tax-deductible IRA contributions might still result in some taxable income to the taxpayer. In addition, taxpayers need to keep records of their income tax deductions and QCDs on an ongoing basis to properly apply the look-back rules. The Notice includes examples illustrating the application of the rules.  

These rules apply to contributions and distributions made for taxable years beginning after Dec. 31, 2019.

• Final regulations on deductions for estate and non-grantor trusts—The Tax Cuts and Jobs Act (TCJA)changed the rules and prohibits individuals, estates and non-grantor trusts from claiming miscellaneous itemized deductions after Dec. 31, 2017. However, there were some questions about whether certain deductions qualified as miscellaneous itemized deductions and were therefore prohibited. Final regulations (Treasury Decision 9918 (effective Oct. 19, 2020)) provide that the following aren’t miscellaneous itemized deductions, and therefore, they’re not affected by the TCJA and are still allowable for estates and non-grantor trusts:

  • Deductions for costs paid or incurred in connection with the administration of the estate or trust that wouldn’t have been incurred if the property wasn’t held in such estate or non-grantor trust;
  • The deduction for personal exemption of an estate or non-grantor trust; and
  • Distribution deductions for trusts distributing current income and for trusts accumulating income.

In addition, the final regulations clarify how to allocate excess deductions to beneficiaries in the year of termination and the character and amount of such excess deductions, under IRC Section 642.

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