In IR–2020–17, the Service warned taxpayers about "ghost" preparers who are not willing to sign returns. Some "ghost" preparers promise large refunds from these tax returns.
Under federal law, a tax preparer must have an IRS Preparer Tax Identification Number (PTIN). A paid preparer must sign each return and include his or her PTIN.
If a tax preparer is not willing to sign the return, consumers should be on guard. This is particularly a risk if the tax preparer promises a large refund or if a preparation fee is based on the size of the refund.
Your ghost preparer may also have one or more of the following red flags.
- Requires payment in cash
- Pads income to qualify for tax credits
- Fakes deductions to increase refund
- Sends refunds to the preparer's bank account
Information on selecting a tax preparer is available on IRS.gov
. The IRS provides a Choosing a Tax Professional page, which explains how to review your preparer's credentials. There also is a Directory of Federal Tax Return Preparers.
Every taxpayer should review their Form 1040 before it is filed. Your tax preparer should be willing to answer any questions that you may have. Because most tax returns and refunds are handled through electronic methods, double check the return for your correct bank account and bank routing numbers.
If you believe your tax preparer is not following proper rules, the IRS offers Form 14157, Complaint: Tax Return Preparer. If a tax preparer files your return without your knowledge or consent, file Form 14157A, Tax Return Preparer Fraud or Misconduct Affidavit.
Solutions for Post-Age 70½ IRA Contributions and QCDs
The Setting Every Community Up For Retirement Enhancement (SECURE) Act increased the age for required minimum distributions (RMDs) from 70½ to 72. The age 72 limit applies for individuals who turn age 70½ on January 1, 2020 or later.
The SECURE Act also repealed the age limit of 70½ for traditional IRA contributions. Most individuals over age 70½ with earned income may make traditional IRA contributions of $6,000 plus a $1,000 "catch up" contribution. The $7,000 traditional IRA contribution for seniors may be phased out for wage earners with higher incomes.
IRA owners over age 70½ may make qualified charitable distributions (QCDs) up to $100,000 each year. These IRA charitable rollover gifts may fulfill an RMD.
Because Congress was concerned that senior IRA owners may make a $7,000 deductible contribution and a QCD each year, Sec. 107(b) of the SECURE Act modifies Sec. 408(d)(8)(A) with the following provision: "The amount of distributions not includable in gross income by reason of the preceding sentence for a taxable year (determined without regard to this sentence) shall be reduced (but not below zero) by an amount equal to the excess of – (i), the aggregate amount of deductions allowed to the taxpayer under section 219 for all taxable years ending on or after the date the taxpayer attains age 70½, over (ii) the aggregate amount of reductions under this sentence for all taxable years preceding the current taxable year."
This change essentially reduces lifetime QCDs by the post-age 70½ traditional IRA contributions.
How can advisors help the 15% to 20% of age 70+ individuals who have earned income and make charitable gifts? Because the QCD is an excellent planning strategy for both the 90% of seniors who do not itemize and upper–income seniors who itemize, professional advisors should understand the three solutions for the post-70½ traditional IRA contributions and QCDs challenge.
- Roth IRA – If an individual is below the 2020 Roth IRA income limits (single filers with income of $124,000 or a married couple with an income of $196,000), it is possible to fund a Roth IRA with $7,000. Because the Roth IRA is funded with after-tax dollars, it does not produce a Sec. 219 deduction and is not subject to the SECURE Act provision that affects traditional IRAs and QCDs.
- Company 401(k) Plans – If an individual has a company 401(k) or other qualified retirement plan, a good strategy after age 70½ is to continue to fund the 401(k) to the maximum. The 2020 401(k) voluntary contributions for seniors are $19,500 + $6,500, for a total of $26,000. Generally, when the employee retires, he or she may either take distributions from the 401(k) or roll it over into an IRA. This company plan strategy is particularly helpful if the individual has income over the traditional IRA contribution limits. The IRA income limits for a single person with a workplace plan are $65,000-$75,000 during 2020. For a married couple, the IRA income limits are $104,000-$124,000.
- Distribute and Deduct – The Roth and corporate plans solutions will apply to nearly all individuals over age 70½ who have earned income. However, if an individual does make post 70½ traditional IRA contributions, he or she may still make QCDs. The post-70½ traditional IRA contributions will reduce the QCDs.
Example: Susan Green is employed and makes a $7,000 traditional IRA contribution at ages 71, 72, 73 and 74. Her total post–70½ traditional IRA contributions are $28,000. At age 75, Susan retires and she has an RMD of $50,000 for that year. Susan is a loyal donor to her favorite charity and decides to make a $50,000 QCD. This is her first QCD and fulfills her age 75 RMD. Because she has taken $28,000 in post-70½ IRA deductions, her QCD at age 75 is reduced from $50,000 to $22,000. However, the $28,000 remaining distribution to charity is included in her adjusted gross income and will be treated as an itemized deduction. Her future QCD gifts are fully permitted.
The post-70½ IRA contribution and QCD rule is fairly easily managed by professional advisors. The Roth and 401(k) solutions are straightforward. Only a small number of donors will actually be impacted by the traditional IRA/QCD offset rule. However, advisors must understand the best solutions to maximize gifts and minimize the impact of this rule.
Applicable Federal Rate of 2.2% for February -- Rev. Rul. 2020-3; 2020-6 IRB 1 (16 Jan 2020)
The IRS has announced the Applicable Federal Rate (AFR) for February of 2020. The AFR under Section 7520 for the month of February is 2.2%. The rates for January of 2.0% or December of 2.0% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.