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IRA charitable donations: An alternative to taxable required distributions

Are you a charitably minded individual who is also taking distributions from a traditional IRA? You may want to consider the tax advantages of making a cash donation to an IRS-approved charity out of your IRA.

When distributions are taken directly out of traditional IRAs, federal income tax of up to 37% in 2022 will have to be paid. State income taxes may also be owed.

Qualified charitable distributions

One popular way to transfer IRA assets to charity is via a tax provision that allows IRA owners who are age 70½ or older to direct up to $100,000 per year of their IRA distributions to charity. These distributions are known as qualified charitable distributions (QCDs). The money given to charity counts toward your required minimum distributions (RMDs) but doesn’t increase your adjusted gross income (AGI) or generate a tax bill.

Keeping the donation out of your AGI may be important for several reasons. Here are some of them:

  1. It can help you qualify for other tax breaks. For example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 7.5% of AGI.
  2. You can avoid rules that can cause some or all of your Social Security benefits to be taxed and some or all of your investment income to be hit with the 3.8% net investment income tax.
  3. It can help you avoid a high-income surcharge for Medicare Part B and Part D premiums, which kick in if AGI is over certain levels.
  4. The distributions going to the charity won’t be subject to federal estate tax and generally won’t be subject to state death taxes.

Important points: You can’t claim a charitable contribution deduction for a QCD not included in your income. Also keep in mind that the age after which you must begin taking RMDs is 72, but the age you can begin making QCDs is 70½.

To benefit from a QCD for 2022, you must arrange for a distribution to be paid directly from the IRA to a qualified charity by December 31, 2022. You can use QCDs to satisfy all or part of the amount of your RMDs from your IRA. For example, if your 2022 RMDs are $10,000, and you make a $5,000 QCD for 2022, you have to withdraw another $5,000 to satisfy your 2022 RMDs.

Other rules and limits may apply. Want more information? Contact us to see whether this strategy would be beneficial in your situation.

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Businesses: Prepare for the lower 1099-K filing threshold

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Businesses should be aware that they may be responsible for issuing more information reporting forms for 2022 because more workers may fall into the required range of income to be reported. Beginning this year, the threshold has dropped significantly for the filing of Form 1099-K, “Payment Card and Third-Party Network Transactions.” Businesses and workers in certain industries may receive more of these forms and some people may even get them based on personal transactions.

Background of the change

Banks and online payment networks — payment settlement entities (PSEs) or third-party settlement organizations (TPSOs) — must report payments in a trade or business to the IRS and recipients. This is done on Form 1099-K. These entities include Venmo and CashApp, as well as gig economy facilitators such as Uber and TaskRabbit.

A 2021 law dropped the minimum threshold for PSEs to file Form 1099-K for a taxpayer from $20,000 of reportable payments made to the taxpayer and 200 transactions to $600 (the same threshold applicable to other Forms 1099) starting in 2022. The lower threshold for filing 1099-K forms means many participants in the gig economy will be getting the forms for the first time.

Members of Congress have introduced bills to raise the threshold back to $20,000 and 200 transactions, but there’s no guarantee that they’ll pass. In addition, taxpayers should generally be reporting income from their side employment engagements, whether it’s reported to the IRS or not. For example, freelancers who make money creating products for an Etsy business or driving for Uber should have been paying taxes all along. However, Congress and the IRS have said this responsibility is often ignored. In some cases, taxpayers may not even be aware that income from these sources is taxable.

Some taxpayers may first notice this change when they receive their Forms 1099-K in January 2023. However, businesses should be preparing during 2022 to minimize the tax consequences of the gross amount of Form 1099-K reportable payments.

What to do now

Taxpayers should be reviewing gig and other reportable activities. Make sure payments are being recorded accurately. Payments received in a trade or business should be reported in full so that workers can withhold and pay taxes accordingly.

If you receive income from certain activities, you may want to increase your tax withholding or, if necessary, make estimated tax payments or larger payments to avoid penalties.

Separate personal payments and track deductions

Taxpayers should separate taxable gross receipts received through a PSE that are income from personal expenses, such as splitting the check at a restaurant or giving a gift. PSEs can’t necessarily distinguish between personal expenses and business payments, so taxpayers should maintain separate accounts for each type of payment.

Keep in mind that taxpayers who haven’t been reporting all income from gig work may not have been documenting all deductions. They should start doing so now to minimize the taxable income recognized due to the gross receipts reported on Form 1099-K. The IRS is likely to take the position that all of a taxpayer’s gross receipts reported on Form 1099-K are income and won’t allow deductions unless the taxpayer substantiates them. Deductions will vary based on the nature of the taxpayer’s work.

Contact us if you have questions about your Form 1099-K responsibilities.

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No ‘I’ in team: The collaborative management model

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For employers of all types, the notion of a single leader dictating orders from on high has increasingly fallen out of favor. As concepts such as diversity, equity and inclusivity have flourished, management-level employees now generally expect to get a say in how work is done and even the organization’s strategic direction.

With this in mind, more and more employers are turning to a collaborative management model to set strategic priorities, adjust work practices, improve HR policies and look for growth opportunities.

Form a leadership team

Successful collaboration starts with a new mindset. Whether you’re a business owner, nonprofit exec or agency head, the first step is to stop thinking of managers as employees and instead regard them as members of a leadership team working toward fulfilling your organization’s mission.

To promote collaboration and make the best use of your human resources, clearly communicate your strategic objectives. For example, if you’ve prioritized expanding into new territories, make sure your managers aren’t still focusing on extracting new business from current sales areas.

You also must be willing to listen to managers’ ideas — and to act on the viable ones. Relinquishing control can be hard for many business owners and top organizational leaders, but keep the advantages in mind. A collaborative approach distributes the decision-making burden, so it doesn’t fall on just your shoulders. This can relieve stress and allow you to focus on areas of strength or those you might have neglected because you’re so busy.

Focus on development

Even as you move to a more collaborative management model, and include managers in strategic decisions, don’t forget to recognize their individual skills and talents. For instance, you and other managers could have uncertainties about a new marketing plan, but you should trust your marketing director to carry it out with minimal oversight.

To ensure that managers know they have your confidence, conduct regular performance reviews where you note their contributions and accomplishments and set challenging though attainable goals. Moreover, help them grow professionally by providing constructive, ongoing training to develop their leadership and teamwork skills.

Be a team player

No matter what your organization’s mission, you’re more than likely engaged in a “team sport.” That is, if you assemble a strong leadership team around you, your odds of success go way up. And don’t stop at the management level — gathering input from every level of the organizational chart can pay great dividends. Contact us for help assessing the profitability impact and potential of your managers.

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Forecasts vs. projections: What’s the big difference?

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Financial statements look at historical performance. But there are times when you want forward-looking reports to help your business make strategic investment decisions, evaluate the viability of a turnaround plan or apply for a loan. Your accountant can help ensure the assumptions underlying prospective financial statements make sense in today’s volatile marketplace.

Key definitions

When creating forward-looking financials, you generally have two options under AICPA Attestation Standards Section 301, Financial Forecasts and Projections:

1. Forecast. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations and cash flows. A financial forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take.

2. Projection. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations and cash flows. A financial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as, “What would happen if … ?”

Subtle difference

The terms “forecast” and “projection” are sometimes used interchangeably. But there’s a noteworthy distinction, a forecast represents expected results based on the expected course of action. These are the most common type of prospective reports for companies with steady historical performance that plan to maintain the status quo.

On the flip side, a projection estimates the company’s expected results based on various hypothetical situations that may or may not occur. These statements are typically used when management is uncertain whether performance targets will be met. So, they may be appropriate for start-ups or when evaluating results over a longer period because there’s a good chance that customer demand or market conditions could change over time.

Critical components

Regardless of whether you opt for a forecast or projection, the report will generally be organized using the same format as your financial statements with an income statement, balance sheet and cash flow statement. Most prospective statements conclude with a statement of key assumptions that underlie the numbers. Many assumptions are driven by your company’s historical financial statements, along with a detailed sales budget for the year.

Instead of relying on static forecasts or projections — which can quickly become outdated in a volatile marketplace — some companies now use rolling 12-month versions that are adaptable and look beyond year end. This helps you identify and respond to weaknesses in your assumptions, as well as unexpected changes in the marketplace. For example, a manufacturer that experiences a shortage of raw materials could experience an unexpected drop in sales until conditions improve. If the company maintains a rolling forecast, it would be able to revise its plans for such a temporary disruption.

Contact us

Planning for the future is an important part of running a successful business. While no forecast or projection will be 100% accurate in these uncertain times, we can help you evaluate the alternatives for issuing prospective financial statements and offer fresh, objective insights about what may lie ahead for your business.

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Inflation enhances the 2023 amounts for Health Savings Accounts

The IRS recently released guidance providing the 2023 inflation-adjusted amounts for Health Savings Accounts (HSAs). High inflation rates will result in next year’s amounts being increased more than they have been in recent years.

HSA basics

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage, and $10,000 for family coverage.

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year 

In Revenue Procedure 2022-24, the IRS released the 2023 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2023, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $3,850. For an individual with family coverage, the amount will be $7,750. This is up from $3,650 and $7,300, respectively, for 2022.

In addition, for both 2022 and 2023, there’s a $1,000 catch-up contribution amount for those who are age 55 and older at the end of the tax year.

High deductible health plan defined. For calendar year 2023, an HDHP will be a health plan with an annual deductible that isn’t less than $1,500 for self-only coverage or $3,000 for family coverage (these amounts are $1,400 and $2,800 for 2022). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, for 2022).

Reap the rewards

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors.

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Adding an arbitration provision to an ERISA-compliant retirement plan

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When you see the word “arbitration,” you might think of a business dispute, divorce proceeding or perhaps a big-league ballplayer at odds with his team about that season’s salary.

But retirement plans that must comply with the Employee Retirement Income Security Act (ERISA) might also be subject to arbitration — if they include an enforceable provision for this purpose. A recent court case, Holmes v. Baptist Health South Florida, provides some insight.

Participants’ allegations

In Holmes, former and current participants in a 403(b) plan filed a lawsuit claiming that the plan’s fiduciaries violated their ERISA fiduciary duties in selecting and reviewing the plan’s investment funds.

In response, the fiduciaries asked the court to require that the dispute be arbitrated — pointing to a plan provision requiring that plan-related claims be resolved exclusively by binding arbitration. The provision also prohibited arbitrations on a representative or class basis, as well as any remedial or equitable relief providing additional benefits or monetary relief to anyone other than the claimant.

The participants asserted that the arbitration provision violated the “effective vindication” doctrine, and that they hadn’t agreed to its addition to the plan by amendment in 2020.

Court’s response

The court acknowledged that an arbitration provision may be unenforceable under the effective vindication doctrine if the provision operates as a prospective waiver of a right to pursue a statutory remedy.

In this case, however, the participants’ request for plan-wide nonmonetary relief — that is, removal and replacement of the current fiduciaries — wasn’t barred by the plan’s arbitration provision. Thus, the court held that the effective vindication doctrine didn’t apply.

The court went on to say that the provision’s bar against plan-wide monetary relief was permissible because such relief was available only for claims brought on a class basis, and waivers of class-based claims have been held enforceable under applicable circuit precedent.

Turning to the question of consent, the court acknowledged that it was “unseemly” for the participants to be bound by a provision they’d never agreed to. However, the fact that they hadn’t agreed to it — and that one of the participants had terminated employment and received a distribution of her entire account before it was adopted — was irrelevant.

The fiduciary breach claims were brought on behalf of the plan, so what mattered was whether the plan had agreed to arbitrate. On this issue, the court held that the plan had agreed to the amendment because the plan document expressly permitted unilateral amendment by the plan sponsor.

It’s in the details

Courts appear to broadly agree that ERISA cases are generally subject to arbitration. However, whether a particular binding arbitration provision is enforceable will likely depend on subtle differences in the facts, claims made and the provision’s wording. Many plan sponsors and their participants might be surprised to learn that an arbitration provision can be added to a plan simply by permitting unilateral amendments.

Your attorney can help you better understand the details and potential exposures of your ERISA-compliant plan. Meanwhile, feel free to contact our firm for help assessing the advantages, risks and costs of your retirement plan or any other employee benefit.

Holmes v. Baptist Health South Florida, No. 21-22986-Civ-Scola, Jan. 20, 2022 (U.S. District Court for the Southern District of Florida)

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