The PATH to Tax Savings

PATHThe Protecting American from Tax Hikes Act of 2015  finally brings certainty for taxpayers who want to make charitable contributions from IRAs — a great tax saving strategy .

The Protecting American from Tax Hikes Act (PATH) became law on December 18, 2015 and makes permanent the IRA charitable rollover provision. This means that taxpayers can exclude up to $100,000 from their gross income to be put toward “qualified charitable contributions” from an IRA. However, I am not sure what part of this Act actually protects Americans from tax hikes…

You will remember that when first enacted, PATH was supposedly a temporary measure. However, ever since its enactment in 2006, Congress has incrementally extended the charitable rollover provision every 2 years. The problem was that the extensions always came after the provision’s specified expiration date.  This rather sloppy handling of a valuable tax strategy left taxpayers uncertain as to whether or not this charitable rollover would actually be available from one year to the next.

The first step in the process every taxpayer must meet to employ this strategy is that all distributions must be made to a ‘public charity’ as defined in Section 170(b)(1)(A) of the Act.  Once that step has been taken, Section 408(d)(8) describes how distributions must be made in order to meet certain requirements. These requirements include the following:

  • The distribution must be from a traditional or Roth IRA.
  • The IRA account-holder must be at least 70.5 years old.
  • The distribution must be made directly from the IRA to the charity.
  • The distribution must be deductible as a charitable contribution.
  • The distribution must be otherwise taxable as gross income.

The PATH Act indefinitely extended the charitable IRA rollover and made it retroactively effective to January 1, 2015. Although this legislation complicated things for the 2015 tax year, the permanency of Section 408(d)(8) now offers a level certainty for those who want to make IRA charitable distributions in 2016 and onward.

The Act also addressed important provisions that expand the ways in which a qualified beneficiary can use the distributions from a 529 plan as well as eliminate the in-state plan requirements for ABLE accounts. Since ABLE accounts have a 'payback" provision to the specific state that provided Medicaid and other entitlement benefits, there is concern as to how the states will work together to ensure their reimbursement obligations are met. You may remember my blog on these important savings accounts for the disabled. (https://blog.zarembalaw.com/2015/02/able-accounts-offer-savings-strategy-for-kids-with-special-needs.html).

To learn more about the PATH Act and how it affects your estate plan or to explore the panoply of tools we employ to help you reach your goals, give us a call at 757-259-0707 to schedule your complimentary consultation.

References:  Kitces. com(DECEMBER 16, 2015)  “Congress Approves (Mostly Permanent) 2015 Tax Extenders Legislation For QCDs And More!” and “Summary Of Key Tax Extenders Under H.R. 2029, The Protecting Americans from Tax Hikes (PATH) Act Of 2015”

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