Each year the Internal Revenue Service (IRS) reminds owners of traditional IRAs who are over 70½ that they may make a charitable gift from a traditional IRA. The IRS refers to an IRA charitable rollover gift as a qualified charitable distribution (QCD). An added benefit for those who are age 73 or older is that a QCD may fulfill part or all of your required minimum distribution (RMD) for the year.

It is helpful for owners of traditional IRAs to understand how to do a QCD, what is required to report a QCD on your tax return and the required information on your acknowledgment from the nonprofit.

1. How to Set Up a QCD — A traditional IRA owner may contact his or her IRA custodian to start the process for a QCD. While your distributions from a traditional IRA are normally taxable, the QCD payouts will be tax-free as long as they are paid directly to a qualified nonprofit. The QCD is made through a check payable to the nonprofit. An electronic payment or a check made out to the IRA owner does not qualify as a QCD. The owner must be age 70½ or over and the 2024 limit is $105,000. If both spouses are over age 70½, and have their own IRA, then the $105,000 per person limit may allow a couple to distribute up to $210,000 per year to the nonprofit. Since QCDs are not taxable, there will be no charitable deduction for making the gift.
2. How to Report Your QCD — Your QCD must be reported on your 2024 federal income tax return. You can expect to receive an IRS Form 1099-R from your IRA custodian. This will show the traditional IRA distribution in Box 1. Generally, you will report the IRA distribution on Line 4 of IRS Form 1040 (the final IRS 2024 tax return may use a different line but is likely to use Line 4). You will enter the total amount of the IRA distribution on Line 4a. If the full amount is a QCD, you then enter zero on line 4b. If part of the distribution is a QCD, the taxable portion is normally entered on Line 4b. You must enter "QCD" next to Line 4. If you have entered zero on Line 4b, the entire QCD will not be taxable.
3. How To Receive a QCD Acknowledgment — Your QCD is not deductible as a charitable contribution. However, you are required to obtain a written QCD acknowledgment from the nonprofit prior to filing your return. This acknowledgment should state the date and amount of the QCD and that the donor has received "no goods or services in exchange for the gift." You should retain the acknowledgment with your other 2024 tax records.

Editor's Note: Many individuals will fulfill part or all their RMD this year through a gift to charity from a traditional IRA. It is best to start the gift process in November or early December. Some IRA custodians may take longer than expected to process the transfer. If a donor has the right to make distributions from his or her traditional IRA through a checkbook, it will be important to send the check directly to the charity. A donor must allow sufficient time for the charity to deposit the check and for the financial institution to process the check. This process must be completed by December 31, 2024 to qualify as an RMD for 2024.

IRA and 401(k) Contributions in 2025

In Notice 2024-80; 2024-47 IRB 1, the Internal Revenue Service (IRS) announced 401(k) and IRA contribution limits for 2025. The IRA limit remains $7,000 in 2025. Individuals age 50 or over may make a catch-up contribution of $1,000 for a total transfer of $8,000.

Traditional IRA contributions from earned income are tax deductible. The traditional IRA has two main tax benefits – contributions are tax deductible and grow tax free. If you are covered by a qualified retirement plan at your workplace, the IRA deduction may be reduced or phased out.

1. Single Taxpayers with Workplace Plan — IRA contributions for single taxpayers are phased out for persons with incomes more than $79,000.
2. Married Couple with Workplace Plans — A couple with joint income more than $126,000 will be subjected to the IRA phase out.
3. Married and No Workplace Plan — If one spouse has no workplace plan and the other spouse is covered in his or her workplace, the phase out for a joint return applies to incomes over $236,000.

A Roth IRA is funded with after-tax income. The Roth IRA grows tax free and distributions from a Roth IRA are usually tax free. Roth IRA owners may withdraw contributions tax free at any time. After the Roth IRA has been in existence for five years and the owner is over age 59½, amounts may be withdrawn tax free.

The Roth IRA phase out limits will also increase in 2025.

1. Single Individuals — The Roth IRA phaseout for single persons next year will be $150,000 to $165,000.
2. Married Couples — For married couples filing jointly, the Roth IRA phaseout is $236,000 to $246,000.

Many businesses maintain a 401(k) plan, and most nonprofits provide a 403(b) plan. The 2025 limit for an employee contribution to a 401(k) or 403(b) plan is $23,500. Generally, employees over age 50 may make a catch-up addition of $7,500, for a total transfer limit of $31,000. An exception is available for employees aged 60 to 63, who may make a catch-up contribution of $11,250.

If your employer offers both a traditional 401(k) and a Roth 401(k) plan, you may allocate your employee contribution to one or both funds. The traditional 401(k) amounts are deductible, but the Roth 401(k) contributions are after-tax.

The IRA Charitable Rollover limit for 2025 will be $108,000. The 2025 IRA to Charitable Gift Annuity Rollover limit will be $54,000.

Editor’s Note: Many employers match an employee’s 401(k) contributions. This is a good way to encourage employee participation in the 401(k) plan. The employer match is used to fund the employee’s traditional 401(k) account. The employee may still make contributions to a Roth 401(k) account up to the $23,500 or $31,000 limit.

Tax Reform in 2025

During November, the Senate Finance Committee and House Ways and Means Committee will start to plan for 2025. Since there are hundreds of provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) that sunset at the end of 2025, there will be a major tax bill next year. There are at least ten significant provisions that affect individual taxes that will be considered. With major tax legislation, there are likely to be compromises on many of these provisions.

1. Individual Income Tax Rates — There may be changes in the inflation-indexed brackets. However, the significant change is that the top rate is scheduled to increase from 37% to 39.6%.
2. Child Tax Credit — The current $2,000 credit per child under age 17 is phased out for married couples with adjusted gross income (AGI) over $400,000 and single individuals with income over $200,000. The 2026 credit is $1,000 per child, phased out for joint filers with AGI of $110,000 and single taxpayers with AGI over $75,000.
3. AMT Exemption Amount — The current exemption amounts of $109,400 (joint) or $70,300 (single) with phase outs of $1,252,704 (joint) and $626,350 (single) would be changed. The 2017 exemptions of $84,500 (joint) and $54,300 (single) and phase outs of $160,900 (joint) and $120,700 (single) would be adjusted for inflation to 2026.
4. Standard Deduction — The $30,000 (joint) and $15,000 (single) 2025 standard deductions would be returned to far lower levels. The levels would be the 2017 amounts of $12,700 (joint) or $6,350 (single), adjusted for inflation to 2026.
5. Miscellaneous Itemized Deductions — TCJA repealed many itemized deductions. The 2% floor for miscellaneous itemized deductions would be reinstated along with many of the deductions previously permitted.
6. Personal Exemptions — The repealed personal exemptions would be restored. Generally, the personal exemption would be $4,050 per household member, indexed for inflation to 2026.
7. State and Local Taxes (SALT) — The current SALT deduction limit of $10,000 would be repealed and replaced with an unlimited SALT deduction.
8. Personal Casualty Losses — TCJA disallowed casualty losses except in a federally-declared disaster area. The casualty losses would again be deductible, subject to a floor of 10% of AGI.
9. Cash Contributions to Public Charities — The TCJA’s increase for charitable deductions of cash gifts to 60% of AGI will return to a 50% of AGI limit. Both limits permit a five-year carryforward of excess charitable gift amounts.
10. Estate and Gift Tax Exemption — The gift and estate exemption is $13.99 million in 2025. This would be reduced to $5 million adjusted for inflation to 2026. The likely adjusted amount will be approximately $7 million per individual.

Editor’s Note: It is possible that most of the current tax provisions will be continued. A major discussion will ensue on whether there should be offsets for the TCJA extensions. The estimated cost of extending all provisions is over $4 trillion in a decade. The tax bill will be an important debate in 2025.

Applicable Federal Rate of 4.4% for November: Rev. Rul. 2024-24; 2024-45 IRB 1 (15 October 2024)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2024. The AFR under Sec. 7520 for the month of November is 4.4%. The rates for October of 4.4% or September 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”