Tuesday December 5, 2023
Estimated Tax Payments Due January 17
Taxpayers who are self-employed or independent contractors generally pay quarterly taxes to the IRS. However, other individuals who owed tax last year may also need to make an additional payment. Situations such as having itemized deductions in past years, but now are taking the standard deduction may need to make an estimated tax payment. Others affected could be two wage-earner households, those with additional sources of income such as dividends or individuals with complex tax situations.
The IRS reminds taxpayers that taxable income may include unemployment income, refunds from state tax entities, interest income and gig economy or digital asset payments. Generally, all types of income are included in your adjusted gross income.
Some taxpayers also have received holiday bonuses, end-of-year stock dividends or capital gain distributions. Finally, if you have sold virtual currency or real estate at a profit, this will affect your taxes.
A quick and easy way to make an estimated tax payment is with IRS Direct Pay. You may also make payments through an IRS Online Account. The Electronic Filing Tax Payment System (EFTPS) may also be used.
An estimated tax payment this month could help to avoid a surprise tax bill or an additional tax penalty. When you are thinking about your 2023 taxes, you also may want to consider using the Tax Withholding Estimator on IRS.gov.
IRA Rollover to CGA/CRT FAQs
Section 307 of the Secure 2.0 Act allows a one-time rollover of $50,000 from an IRA to life income plans. This provision amends Internal Revenue Code Section 408(d)(8) and creates a limited one-time IRA rollover to certain qualified life income plans. The $50,000 IRA distribution may be to a non-assignable charitable remainder annuity trust (CRAT), standard payout charitable remainder unitrust (CRUT) or immediate charitable gift annuity (CGA).
These frequently asked questions (FAQs) will be helpful to all development staff and professional advisors.
1. Question: What is the effective date for the IRA rollover to CGA or CRT? Answer: The IRA rollover to CGA/CRT in the Secure 2.0 Act is effective on January 1, 2023.
2. Question: May an IRA owner fund a qualified charitable distribution (QCD) for a $25,000 gift annuity this year, and a second QCD for a $25,000 gift annuity in 2024? Answer: No. Subparagraph (F)(i) states that the QCD is permitted only if "an election is not in effect under this subparagraph for a preceding tax year." Therefore, the IRA to CGA rollover may be used within only one taxable year. If a donor desires to fund multiple gift annuities with up to $50,000, it must be done in one year.
3. Question: May a mother use an IRA rollover to CGA for a gift annuity payable to herself and her daughter? Answer: No. Subparagraph (F)(iv) states that the CGA must be only for "the individual for whose benefit such account is maintained, the spouse of such individual, or both." Therefore, only a spouse may be the second beneficiary. If the IRA owner desires a higher rate for the gift annuity for a spouse, it is possible to create a one life gift annuity for the spouse.
4. Question: Is it possible to do both a $100,000 QCD to a current gift and a $50,000 QCD to a CGA? Answer: It is uncertain until there is guidance from the Joint Committee on Taxation (JCT). Because Section 408(d)(8)(A) for the $100,000 QCD and Section 408(d)(8)(F) for the $50,000 QCD are separate provisions, it is possible that JCT may permit both to be used in one year. Alternatively, Section 408(d)(8)(F)(i) states the $50,000 QCD is governed by subparagraph (B)(i), which refers to the "qualified charitable distribution" provision of the $100,000 limit of subparagraph (A). Under this rationale, JCT could determine the subparagraph (F) $50,000 limit is part of the subparagraph (A) $100,000 amount. It will be important for JCT to clarify this question.
5. Question: Will a $50,000 one-time rollover from a traditional IRA to a CGA fulfill the required minimum distribution (RMD)? Answer: After the Pension Protection Act of 2006 authorized the $100,000 outright QCD, the JCT "Bluebook" indicated the charitable value of the outright gift would qualify for the RMD. Therefore, the charitable gift present value of the CGA residuum or CRT remainder should qualify for the RMD. It is uncertain whether JCT will approve the full $50,000 QCD as counting toward the RMD.
6. Question: If both spouses are over age 70½ and have traditional IRAs, may they contribute $50,000 each to a two life CGA or CRT? Answer: Subparagraph (F)(i) states that a taxpayer may make a QCD that is up to $50,000. It is significant that (F)(ii) states the trust will be funded with "qualified charitable distributions." The language clearly contemplates that more than one QCD to a unitrust is permissible. Therefore, JCT guidance should permit a spousal unitrust or a two-life gift annuity to be funded with a $50,000 QCD from each spouse, provided they both are over age 70½ and the funding is simultaneous.
7. Question: May an IRA owner make a QCD to a net income plus makeup CRT? Answer: No. Only a standard charitable remainder unitrust under Section 664(d)(2) is permitted. The CRUT may not be a net income only, a net income with makeup or a FLIP unitrust.
8. Question: May an IRA owner make a QCD transfer to a CGA or CRT and later assign that gift plan to the charity? Answer: No. Subparagraph (F)(iv) states the charitable remainder split-interest gift must be non-assignable and only benefit the IRA owner and spouse.
9. Question: Can there be an addition of a QCD to an existing CRUT? Answer: No. The CRT must be funded exclusively by QCD's. See Subparagraph (F)(ii).
10. Question: Will the Subparagraph (A) $100,000 limit or the Subparagraph (F) $50,000 limit change in the future? Answer: Yes. Starting in 2024, the limits will be adjusted (based upon inflation) to the nearest thousand dollars.
11. Question: If the ACGA rate for an IRA owner over age 70 1/2 with a younger spouse is under 5%, will that lower payout be permitted? Answer: No. The immediate gift annuity must pay 5% or more. In some regulated states, the insurance commissioner may not permit a selective payment of a gift annuity at a rate higher than the rates previously filed by the issuing charity. In this case, the donor and spouse will need to wait to fund the CGA in a future year.
12. Question: Will all CGA and CRT payments be ordinary income? Answer: Yes. Subparagraph (F)(v) states CRT income will be ordinary income and the gift annuity has no investment in the contract. Therefore, the CGA income will also be ordinary income.
Editor's Note: This FAQ is informational and educational in nature. It is not offering professional tax, legal or accounting advice.
IRS Improvements in 2023
Charles Rossotti was the IRS Commissioner from 1997 until 2002. In response to the passage of the Inflation Reduction Act which included $80 billion in IRS funding, he published an article with recommendations for improvements for the IRS. Rossotti made the following points in his article:
1. Qualified Commissioner —President Biden has appointed Daniel Werfel to be the next IRS Commissioner. Rossotti considers Werfel an "accomplished and experienced executive." The rebuilding program will depend upon highly qualified leadership.
2. Increase IRS Performance — The first and most important goal for the new Commissioner will be to lead the IRS to better and improved performance. Even with new funding, the IRS will be 75% of its size relative to the economy as compared to the 1990s. To increase IRS performance, there should be specific performance goals, rigorous priorities and defined compliance strategies.
3. Strategic Performance Goals — The IRS has multiple responsibilities such as to protect taxpayer data, hire and train a diverse workforce and account for trillions of dollars of taxpayer funds. The IRS must set specific goals to achieve these results. The goals must include methods to track progress for improving taxpayer service.
4. Rigorous Priorities — The IRS must set priorities and track the progress of projects in terms of months rather than years. The IRS needs to improve taxpayer interaction with callbacks, secure electronic access to taxpayer accounts, self-service account updates and secure electronic communication. All these priorities will depend on improved technology.
5. Organizing for Results — The IRS needs an improved governance process. The leadership must make timely and firm decisions on many issues. It may be necessary to adjust or cancel various initiatives. The priority programs must be handled by teams that include legal, tax, data science, technology and communications experts.
6. Compliance Strategies — The tax gap is estimated at over $600 billion per year. About $140 billion of the lost tax revenue is due to underreporting by passthrough entities. If the IRS has third-party data on employers and employees, the compliance rate is over 95%. Where the IRS does not have data, however, the compliance rate is approximately 50%.
7. Tax Gap by Category — The tax gap of approximately $600 billion is primarily due to underreporting. The underreporting by the top 10% of taxpayers ($160,000 in income) is at least half of that tax gap. Over one-third of the tax gap is caused by taxpayers with incomes over $400,000. The IRS will need to use artificial intelligence (AI) and its vast volume of data on taxpayers to make better decisions on audits. The data will need to be improved so that audits on the $1.2 trillion of passthrough income are used to reduce the amount of underreported income.
8. Communicating Effectively — The IRS leadership must communicate with taxpayers, tax professionals and 75,000 staff members located throughout the United States. Honest, accurate and meaningful communication is essential.
The tax system accounts for approximately 20% of the economy. It touches every family, business and major institution. Rossotti concluded that the IRS is "badly in need of transformation to one that taxpayers believe is fair and effective in the 21st century."
Applicable Federal Rate of 4.6% for January — Rev. Rul. 2023-1; 2023-2 IRB 1 (15 December 2022)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2023. The AFR under Section 7520 for the month of January is 4.6%. The rates for December of 5.2% or November of 4.8% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.