by Ryan Beadle

Most taxpayers know that contributions to a tax-deferred retirement account will be taxable income when withdrawn.  However, until January 1, 2010, individuals 70½ and older who make a qualified charitable distribution of up to $100,000 from a traditional IRA will not include the distribution in taxable income.  Married individuals filing jointly may exclude distributions up to $200,000 from income, $100,000 per individual IRA owner.  IRC §408(d)(8)(A).

Such distributions are not taken into account for charitable deduction purposes; that is, the taxpayer cannot claim the contribution as an itemized deduction (No double dipping!).  Most importantly, the distribution must be made by the IRA trustee directly to a charitable organization as described in IRC §170(b)(1)(A) (i.e., 50-percent organizations).

by Ryan Beadle

The Wall Street Journal reported today that the IRS will expand a program that searches for inconsistencies between mortgage payments and income.

                Under the document matching program, the IRS matches forms it is provided for consistency in income reporting.  The most familiar example may be matching an employer-provided Form W-2, with the worker’s Form 1040, to verify the amount of income.

                Each year, a third party lender that collects mortgage interest files Form 1098 with the IRS, reporting the receipt of interest income.  In theory, if a taxpayer paid mortgage interest, he or she should have had income available to pay it.  Based on that assumption, the IRS has routinely checked filed Forms 1098 to identify nonfilers.

                Now, the IRS indicated it will begin to match the amount of interest paid, as shown on Form 1098, with the amount of income reported on Form 1040, to identify possible underreporting of income.

                The IRS believes this may be a good source of information regarding workers that are paid in cash and underreport their income.

                At the same time, many individuals may have lost jobs and dipped into savings in order to continue making their mortgage payments.  That group may include both high net worth families and struggling families.  Their Forms 1040 will not reflect additional income, so the IRS’s Document Matching Program may trigger a “false positive.”

                This serves as a good reminder to every taxpayer to keep accurate and detailed financial records for all information submitted on tax filings with the IRS, in case of an audit.  Given that this is a fresh issue that the IRS has only indicated it will move ahead on, we do not yet know what the IRS will ask a taxpayer to produce in his or her defense.  A good start may be for taxpayers to keep records, as best they can, which show the flow of money from legitimate sources to pay the interest on their mortgages.

by Ryan Beadle

A recent survey indicated that about 55% of adult Americans do not have a will. There may be many reasons for this, but a few of the most popular from the survey were:

1. People don’t believe they have enough wealth to be concerned about planning an estate (24%);
2. People don’t want to contemplate their own mortality (10%);
3. People don’t know who to talk to about wills (9%).

Generally, most believe that estate planning is for two groups: seniors and the wealthy.

It is understandable that death is a gloomy subject. But estate planning is definitely not just for seniors, and it is not just for the super-rich in terms of dollars and cents. There is real value in knowing that your children will be cared for if you can’t. The young, especially with young children, should have just as much incentive, if not more, to plan their estates as anyone else.

In the context of a young family, a will is indispensible in order to accomplish two objectives. First, a parent, through the will, should nominate a guardian, or a line of succession of guardians, in the event the children need one. The alternative to a parent nominating a guardian through a will is for the court to decide who should be guardian—greatly elevating the chances of a family fight over the issue.

Second, a will should ensure that a child younger than 18 does not directly inherit property. If a child is the beneficiary of an estate, and the child directly receives property in excess of $1,500 (each state has its own amount, and that happens to be North Carolina’s amount), the court may appoint a guardian to handle the money for the child until the child turns 18. Guardianships for finances require court oversight, which dissipates the child’s property. Also, at age 18, the child will own the property outright, at a time when the child may not be responsible enough to wisely control even a small amount of property. One sentence in a will can prevent the need for a guardianship for the child’s finances—a sentence that says that any amount given to a child beneficiary may be held in a custodial or trust account for the benefit of the child.