Monday September 16, 2019
Protect Yourself from Hurricane Dorian
After making landfall, Dorian is expected to slowly track up the Florida peninsula into Georgia and the Carolinas. It may move quite deliberately, as was the case with Hurricane Harvey in Texas. If that does occur, there could be major rainfall and massive flooding.
Many individuals in the path of Dorian are preparing to evacuate. These Florida residents will need to gather their personal items and key records if they are forced to move to higher ground.
In IR-2019-147, the Service offered tips on preparing for a natural disaster. These tips are helpful to all Americans. The prudent preparation tips apply to hurricanes, tornadoes, floods, fires, earthquakes and volcanic eruptions.
If you are a resident of Florida or Georgia, the potential floods could require you to vacate your home for weeks or even months. Residents of other states where there may be natural disasters may also face evacuation situations this year. How should you prepare for evacuation? What records and papers should be gathered? There are several helpful actions you can take to protect yourself and your family.
- Time May Be Short - While there is ample warning for a hurricane, with a fire, flood, earthquake or volcanic eruption, you may have an hour or less to gather records, personal mementoes and key papers. You should be prepared with a list of key items and know how to gather them quickly.
- Key Documents - Your "financial travel kit" should include IDs: driver's licenses, passports, Social Security cards, Medicare or health insurance cards and your emergency contact person's phone number and address.
- Medical Items - Retain records and copies of prescriptions and contact information for your doctors. Take prescription drugs with you. Remember to include any medical devices needed for your care. If you depart using public transportation, it is best not to place your medicines in checked luggage, but to keep them in your carry-on bag.
- Financial Items - You will need your checkbook and sufficient cash for a week or two. Following a natural disaster, banks or ATMs may be closed for several days. Merchants may be reluctant to accept credit cards, but will always provide goods and services for cash.
- Personal Items - If you have valuable art or personal collections, document these items through photographs. You can keep photos on a smartphone or USB drive. Alternatively, you can upload pictures to the cloud. Popular cloud services that store pictures include Dropbox, Google Drive or iCloud.
- Safe Deposit Box - A bank safe deposit box is usually protected in most natural disasters. Another option is to store key documents on an encrypted cloud service. Search for "encrypted cloud service" and review the available options. Most cloud services that encrypt your financial and estate planning documents charge from $3-$8 per month.
- Passwords - You could prepare a spreadsheet on a USB drive with all of your passwords. You should use a master password to secure the spreadsheet file. Another option is a cloud password program. It is a secure way to transfer and encrypt all of your passwords. Because you may have 20-80 different finance, retirement, bank, commercial and social media accounts, a password program can be a valuable tool. All of the password programs or the spreadsheets on your USB drives are opened with a master password. You should give the master password to a trusted family member or a professional advisor.
How Charities May Collect IRA Beneficiary Designations
Traditional IRAs are funded with pretax dollars and grow tax free. Many traditional IRAs are created through rollovers of other types of qualified plans at retirement. The Investment Company Institute (ICI) estimated in November 2018 that total retirement assets were $28.3 trillion and IRA balances were $9.26 trillion.
Many loyal donors designate a charity to receive part or all of an IRA. With the rapid growth in the number of IRA designations to charities, many nonprofits have encountered problems with the transfer from custodians to charities upon the demise of the IRA owner. Some IRA custodians may require the charity to create an IRA account, claim that the charity is subject to provisions of the Patriot Act or decide to withhold 10% of the IRA to pay income tax. Charities and their counsel must understand the correct responses to these claims in order to expedite the receipt of IRA proceeds.
Problem: The IRA custodian claims that the charity must set up an IRA account.
Response: The charity is not an individual and therefore not qualified to set up an IRA account. Under Reg. 1.408-2(b), an IRA account must be for "the exclusive benefit of an individual or his beneficiaries." A charity is a corporation and defined as a "person" under the IRC, but a nonprofit corporation is clearly not an individual. Therefore, the charity is not qualified to set up an account. The appropriate response for the custodian is to transfer the designated amount directly to the charity.
Problem: The custodian attempts to apply the Patriot Act or FINRA Rule 2090 (Know Your Customer) to the charity. Some IRA custodians ask for detailed personal and financial information of nonprofit board members.
Response: The USA Patriot Act was passed in 2001 for the purpose of protecting America and reducing the risk that funds would be transferred overseas. Section 326 of the Patriot Act provides that "financial institutions" shall be required to exercise efforts to reduce the risk of funds being used by suspected terrorists or terrorist organizations. Patriot Act Sec. 326 applies if an individual or corporation attempts to open a bank account. The bank must maintain records to verify the person's identity, name, address and other identifying information and ascertain whether or not the person is on the list of known or suspected terrorists.
The Patriot Act and FINRA Rule 2090 (Know Your Customer) do not apply to U.S. nonprofits if they are not creating a bank or IRA account. See Patriot Act Sec. 326. In addition, our U.S. nonprofit is not on the known or suspected terrorist list. Therefore, there is no application of the Patriot Act or FINRA Rule 2090 to the distribution of an IRA balance to a U.S. nonprofit that is not setting up a bank or IRA account.
Problem: The IRA custodian wishes to withhold 10% of the distribution and send it to the IRS.
Response: U.S. nonprofits are tax exempt. While there is generally a requirement to withhold tax on IRA distributions to individuals, it is possible to elect no tax withholding on IRS Form W-4P. In any case, a qualified exempt charity is not subject to income tax and there is no requirement for withholding.
Letter to General Counsel to Facilitate IRA Collection
Some IRA custodians may create roadblocks which delay distributions to nonprofits. In order for a nonprofit to collect its share of an IRA, it may be necessary to send a letter to the general counsel of the bank or other financial custodian. Two specimen letters.
The first letter is sent to IRA custodians who require the nonprofit to create an inherited IRA account. However, some enlightened IRA custodians do not require the nonprofit to set up an inherited IRA account and the second letter may be used. Nonprofits are granted permission to use these letters with the nonprofit's name, address and specific goals. The donor's name and account number must also be updated.
Iowa attorney Johni Hays and Michael Kenyon, President of the National Association of Charitable Gift Planners, are collaborating and at a future date will publish a list of the "enlightened" IRA custodians on www.charitablegiftplanners.org.
IRS Reports Impact of TCJA
The Tax Cuts and Jobs Act (TCJA) was the first complete revision of the Internal Revenue Code since 1986. Many TCJA provisions dramatically impacted taxpayers. Because 2018 was the first tax year with full implementation of TCJA provisions, the IRS data for the 2019 filing season illustrates these substantial changes.
- Alternative Minimum Tax (AMT) - The AMT exemption phaseout level was raised to $500,000 for individuals and $1,000,000 for couples. In tax year 2017, the phaseout was much lower and 4.07 million taxpayers paid AMT of $21.7 billion. With the higher phaseout levels in 2018, only 78,328 taxpayers were subject to AMT. They paid $968 million in AMT.
- Standard Deduction - The TCJA approximately doubled the standard deduction for individuals and married couples. This increase simplified tax returns for 28 million taxpayers who changed from itemizing deductions to the standard deduction. In 2017, there were 42.1 million itemizers with $1.16 trillion in deductions. This number declined to 14.6 million itemizers in 2018 with $480 billion in deductions. The decline from 35% itemizers to 10% itemizers may have caused US charitable giving to decline by about 2% in 2018.
- State and Local Tax (SALT) Deductions - The TCJA capped the SALT deduction at $10,000. In 2017, over 40 million taxpayers claimed $302 billion in SALT deductions. However, in 2018 the cap resulted in only 14 million returns claiming $157 billion in SALT deductions.
- Child Tax Credit (CTC) - The IRS reported the significant increase to $2,000 per eligible child created a much larger benefit for families. In 2017, 21 million taxpayers claimed a $25 billion benefit. In 2018, over 37 million taxpayers received $76 billion through the CTC.
Applicable Federal Rate of 2.2% for September -- Rev. Rul. 2019-20; 2019-36 IRB 1 (16 August 2018)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2019. The AFR under Section 7520 for the month of September is 2.2%. The rates for August of 2.2% or July of 2.6% 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 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.