Clarification on the Minimum Required Distribution rules

Ken milani

Q: Your December 14 column that described the Minimum Distribution Required (RMD) provisions was incomplete. Specifically, information about the current employer and Qualified Charitable Distribution (QCD) coverage.

– RC, e-mail

A: GUILTY… of the sin of omission. When a taxpayer owns 5% or more of a business in which he is currently employed, the minimum distribution requirements (RMD) rules apply when the taxpayer reaches the age of 72 (or 70½ years for taxpayers who reached this age by December 31 at the latest). 2019). Our QCD (Qualified Charitable Distributions) coverage sparked much discussion. Here is TROTS (The rest of the story). QCDs are very useful for taxpayers who do NOT itemize deductions but wish to make a charitable contribution. As several readers have pointed out, a QCD will reduce the amount you receive personally. So, if you are more interested in maximizing payments for yourself, then QCDs are not for you. However, those fortunate enough to have sufficient assets can make charitable contributions directly to IRAs in order to meet the RMD requirement and pay no tax on the QCD withdrawal. It can also help a taxpayer avoid moving to a higher tax bracket. Finally, QCDs are only allowed when IRA resources are in use. Our “broad brush” approach left the impression that a QCD could be done from any pension plan.

Q: I opened an annuity account several years ago. In 2021, the first check from the account was received. Can you clarify the tax treatment of money received from an annuity?

– ST, e-mail

A: We will use the “big brush” approach again when we discuss this, because IRS Publication 575 – Pension and Annuity Income – is a mind-numbing 51-page effort available at In general, a portion of each annuity can be received tax free. An exclusion is determined for each contract based on the taxpayer’s investment (aka base) divided by the expected return. The expected return element is linked to the type of annuity contract (for example, fixed number of years; life expectancy with tables provided by the IRS; special treatment of plans in place on June 30, 1986; multiple life, variable , temporary).

Using the KISS principle (Keep It Simple, Sirs), here is an example. A taxpayer’s investment in a fixed annuity (say 20 years) amounts to $ 300,000. The authorized exclusion will be $ 15,000 / year (ie $ 300,000 divided by 20). If the taxpayer’s annuity payments in 2021 were $ 18,000, Form 1040 would show the full $ 18,000 on line 5a, but only $ 3,000 ($ 18,000 minus $ 15,000) would show on line 5b.

Surgeon General Alert: If the annuity is not a life annuity (i.e. it has some sort of label like spouse; spouse and survivor; variable not eligible), you are strongly encouraged to transform the “big fat” in a tax professional and reliable software or the company that sold you the annuity since (you have been warned) publication 575 will put you to sleep before you reach page 5.

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Important reminder of “Ken and Klee”. It’s a big week (in the absence of the Georgia-Alabama conflict) to recheck your federal income and withholding tax for 2021. If you need to make an estimated payment to the IRS, please see the Instructions for Form 1040-ES available at www. You will notice that the IRS allows several payment methods in addition to a check. IRS Direct Pay information includes a variety of choices. To avoid a possible penalty, final payment is due on or before January 18, 2022. For your information, most states meet this date if an estimate is due at the state level. In most cases, estimated federal income taxes for 2021 are mandatory if both of the following conditions apply; (1) You expect to owe at least $ 1,000 in federal tax for 2021 after subtracting withholding taxes, refundable credits, and other estimated payments made during 2021 and (2) withholding, refundable credits, and tax payments. Federal tax estimates should be the lowest. of (a) 90 percent of the income tax reported on your 2021 1040 form or (b) 100 percent of the tax reported on your 2020 income tax return that covered 12 months.

Rick Klee was Tax Director at the University of Notre Dame from 1998 to August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact him at [email protected]

Ken Milani is Professor of Accounting at Notre Dame where he was the Faculty Coordinator of the Notre Dame Tax Assistance Program. Contact him at [email protected] Send questions to either.


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