Summer 2024 Tax Update

Are you married, but only one of you works and earns compensation? You can make a spousal IRA contribution for the nonworking spouse. For 2024, if you file a joint tax return, you and your spouse can each contribute up to $7,000 to an IRA, plus a $1,000 catch-up contribution for people 50 and up. It doesn’t matter if one spouse has zero earned income, provided the other spouse has taxable compensation. Note that the total of your combined contributions to your IRAs can’t exceed the taxable compensation shown on your 2024 return. Anyone can contribute to a traditional IRA, no matter how high your taxable income. However, there are income limits on Roth IRA contributions. You can qualify to make a full Roth IRA contribution for 2024 if your joint adjusted gross income is less than $230,000. (It phases out for AGIs between $230,000 and $240,000.)

 For traditional IRA owners 70½ or older… Here’s a tax-smart way to give to charity: Make a qualified charitable distribution. For 2024, you can transfer up to $105,000 directly from your IRA to charity. For individuals with more than one IRA, the $105,000 cap applies per account owner, not per IRA. The amount next year will be a bit higher because of inflation indexing. Spouses who each have an IRA can do their own QCD. You can each give up to $105,000, provided each of you has substantial amounts in your traditional IRAs. There are three main tax benefits of QCDs. First, they are not taxable to you.  Second, they are not added to your adjusted gross income, which can help you mitigate surcharges on your 2026 monthly Medicare premiums. The QCD strategy is an effective way to get tax savings from charitable gifts for taxpayers who don’t itemize because of higher standard deductions. But even if you do itemize on Schedule A, QCDs are a good tax strategy because the distributions don’t increase your AGI.  Third, QCDs can count toward your annual required minimum distributions, but be sure to do the QCD before taking your full RMD for the year for yourself.  Note you can’t deduct the QCD as a charitable contribution on Schedule A.

 IRS’s final regulations explain how the inherited IRA 10-year rule works And, to the dismay of many, keeps a controversial distinction in place: Whether an IRA owner dies before or after his or her RMD beginning date. If the owner dies before, then beneficiaries needn’t take annual payouts. They can opt to wait until year 10 to take the money, get yearly distributions,or skip years, provided the IRA is fully depleted by the end of the 10-year period. If the owner dies on or after the RMD start date, annual payouts are required. Beneficiaries must take yearly RMDs over the 10-year period, beginning with the year after the original IRA owner died. This means RMDs must be paid to the beneficiary in years 1 through 9, with the rest of the account fully depleted by year 10. In this situation, the beneficiary figures annual RMDs based on his or her own life, so the younger the beneficiary, the smaller the yearly RMD amounts. Of course, the beneficiary can withdraw larger amounts from the IRA if he or she so chooses.

There’s relief if the IRA owner died in 2020, 2021, 2022 or 2023. Beneficiaries of IRAs in which the original owner was already subject to RMDs won’t be penalized for not taking payouts in 2021-24. They needn’t make up for the missed distributions. In figuring the 2025 RMD, they start with the life expectancy factor that applied to the beginning of the 10-year period and subtract one for each subsequent year. For example, a beneficiary inherits an IRA in 2021, the 10-year clean-out rule applies, the decedent started taking RMDs before death and the beneficiary didn’t take RMDs in 2022, 2023 or 2024. Under IRS’s final rules, the beneficiary needn’t make up for the three years of missed RMDs. He or she must take only seven years of RMDs, starting with the first payout in 2025, and clean out the account by the end of 2031.