IRA's and Tax Credits
IRS finally provides clarity on inherited IRAs…
Almost five years after Congress curbed stretch IRAs for many beneficiaries. Before 2020, IRA owners could leave their accounts to their kids, grandkids, etc., and heirs could stretch RMDs over their lifetimes. Congress saw this as a loophole and curtailed it.
There’s a 10-year clean-out requirement.
It applies to many IRAs inherited after 2019. Funds must be distributed within 10 years after death. So, if an IRA owner dies in Oct. 2024, the beneficiary must clean out the IRA no later than Dec. 31, 2034.
Eligible designated beneficiaries are exempt from the 10-year rule. This applies to surviving spouses or minor children (until age 21), the chronically ill or disabled, and people who are not more than 10 years younger than the decedent. They can still do stretch IRAs. Ditto for individuals who inherited IRAs before 2020. A surviving spouse also has the option to take the inherited IRA as his or her own.
IRS’s final regulations explain how the inherited IRA 10-year rule works…And, to the dismay of many, keep 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.
Beneficiaries of Roth IRAs are also subject to the 10-year rule…
With two key differences. They needn’t take annual RMDs over 10 years. Also, similar to Roth IRA owners, Roth beneficiaries aren’t taxed on distributions.
TAX CREDITS
If you’re getting subsidies for health coverage bought on an exchange…
Notify the exchange of changes that could affect the health premium credit. This could include changes in family size, household income and other circumstances, such as starting a job with an employer that provides health coverage to employees. For example, if you lost a job, the exchange will hike the subsidy for future months. It will lower the subsidy amount if you let it know you expect higher income in 2024. If your 2024 income ends up being higher than estimated when you bought your policy, the health premium credit that you figure on your Form 1040 next year may be lower than the advance premiums you got, leading to a smaller refund or even a tax bill.
Filers who faultily report health premium credits are IRS audit targets.
Would a large tax credit entice you to donate your kidney to a stranger?
Then you might be interested in this idea from the Coalition to Modify NOTA, an advocacy organization that highlights the need for kidney donations to strangers. Its proposal, the End Kidney Deaths Act, would establish a 10-year pilot program to give a refundable $50,000 tax credit…$10,000 over five years…to living donors who donate a kidney to a stranger. The donated kidneys would go to patients who have been waiting the longest on the kidney transplant waitlist. The group touting this proposal says that it could save taxpayers billions in health care costs. The group has been lobbying Congress and the states to consider such a proposal.