In IR–2022–52 the Internal Revenue Service reminded taxpayers to consider taking a deduction for a 2021 contribution to an Individual Retirement Account (IRA). The contribution may be made prior to filing your tax return on April 18, 2022.
IRAs are a popular savings plan. Individuals with earned income may contribute to a traditional IRA and qualify for a deduction on their 2021 tax return. Traditional IRA or Roth IRA contributions are subject to many rules and limits. IRA contributions may be reduced for individuals with higher incomes.
- IRA Contribution Limits — The basic rule for an IRA contribution is a limit of $6,000 for individuals under age 50. Individuals age 50 or older are permitted to add $1,000 as a "catch–up" contribution, for a total amount of $7,000. The contribution limit is not affected by rollovers of existing IRAs.
- IRA Deduction Limits If Covered — If you are covered by a retirement plan at work and your income is above specific limits, you may be limited in your IRA contribution amount. A single person may take a full IRA deduction with $66,000 or less of modified adjusted gross income (MAGI). The IRA contribution is phased out between $66,000 and $76,000 of MAGI. If you are married and filing jointly or you are a qualified widower, the MAGI limit is $105,000 and the IRA is phased out over the next $20,000. Married couples filing separately have a limit of $10,000 of MAGI.
- IRA Deduction Limits If Not Covered — If you do not have a retirement plan at work, there are higher limits. A single person or married person filing jointly whose spouse is not covered by a retirement plan may contribute any amount to an IRA even if he or she has a high income. If you are married to a spouse who is covered by a plan at work, the MAGI limit is $198,000 and the IRA deduction is phased out over the next $10,000. If you are married and filing separately with a spouse who is covered, the MAGI limit is $10,000.
- Roth IRA Contribution Limits — If you are married and filing jointly or you are a qualifying widower and desire to make an after–tax Roth IRA contribution, you may do so if your MAGI is less than $198,000. The Roth IRA contribution is phased out over the next $10,000. If you are single or head of household, your Roth contribution limit is $125,000 and the amount is phased out over the next $15,000. If you are married filing separately, the MAGI limit is $10,000.
- IRA Contributions After Age 70½ — For tax year 2021, there is no longer an age limit on contributions to traditional IRAs. You may contribute to a Roth or traditional IRA if you have earned income.
- Spousal IRAs — If you file a joint return and your spouse has earned income, you are qualified to contribute to an IRA even if you did not have income. The limit for both spouses is the $6,000 or $7,000 contribution per spouse (depending upon age), but may not exceed your total earned income.
- Tax on Excess IRA Contributions — If you contribute more than your qualified IRA amount, there is a 6% tax each year on the excess amounts in your IRA. To avoid a 6% tax on the excess contribution, you should withdraw that amount by April 18, 2022.
New IRS Staff and Bots to Resolve Tax Return Backlog
On March 10, 2022, IRS Commissioner Charles Rettig stated that the IRS now has a plan to resolve the pandemic tax return backlog. There are still millions of taxpayers whose paper tax returns have not been processed and are awaiting tax refunds for year 2020. Millions of letters sent to the IRS remain unanswered. The IRS notes this "has created one of the most challenging tax filing seasons in our nation's history."
IRS Commissioner Rettig stated, "IRS employees have been working tirelessly to process backlogged returns and taxpayer correspondence. To ensure inventory is back to a healthy level for next filing season, we are leaving no stone unturned — taking an all–hands–on–deck approach to ensure as many employees as possible are dedicating time to return processing. This includes bringing on new employees and reassigning current IRS employees to process inventory."
The IRS has announced that it will substantially increase new hiring, create a surge team, pay overtime and use artificial intelligence and chat bots to help reduce the backlog.
- 10,000 New Employees — The IRS plans to fill 5,000 open positions at IRS centers in Kansas City, Austin and Ogden during the coming months. By the end of 2022, the IRS will add an additional 5,000 new staff, for a total of 10,000 new staff. The new staff will begin clearing the tax return backlog as soon as possible.
- Surge Team of 700 Individuals — The IRS is creating a "Surge Team" by mobilizing 700 employees from the Austin, Ogden and Kansas City centers to help process returns. The surge team will be able to close millions of cases each month. A second surge team will focus on processing amended 2020 returns and answering taxpayer letters.
- Overtime Approved for IRS Employees — The IRS has now created a mandatory overtime guideline for over 6,000 employees. These employees will process the delayed 2020 returns.
Chat Bot Solution
IRS Commissioner Rettig acknowledged that IRS telephone service is far below what is needed. He stated "Our phone lines continue to see unprecedented demand, and the IRS continues to look for ways to help people and avoid long wait times. Our telephone representatives remain an important part of the service we provide, but these bots can help some people avoid lengthy phone delays for something that could be resolved on the spot. This is part of a large effort to help people get the assistance they need this tax season."
The IRS has implemented both voice and chat bots in English and Spanish. The chat bots explain how to make one–time payments, answer frequently asked questions and clarify notices. The voice bots use artificial intelligence (AI) and communicate with taxpayers through natural language. Chat bots are used for web–based text interaction. The chat bots also use artificial intelligence software to respond to natural language. Darren Guillot, Commissioner of Small Business/Self Employed Collection at the IRS stated, "Voice and chat bots interact with taxpayers in easy–to–follow ways, which means taxpayers do not have to wait on hold to handle simple tasks."
The IRS deserves credit for admitting that it has a massive tax return problem. However, the new staff is likely to require two to three months of training before they can provide full service. The bots and artificial intelligence efforts will be helpful to taxpayers during this filing season.
House Members Support DAFs
In a March 7, 2022 letter to all Members of Congress, a bipartisan group of 11 Members from the Ways and Means Committee expressed strong support for donor advised funds (DAFs).
The letter recognized that there has been a huge need for assistance for the needy during the past two years of the COVID–19 pandemic. The 11 Members note, "This incredible response would not have happened without donor advised funds (DAFs). Donor advised funds are flexible charitable giving vehicles that make it easy for individuals and families to contribute to charity — and they are just one of several tools used by community foundations, national charities, and other nonprofits to help donors connect their giving to causes in their communities."
During year 2020, DAFs made grants of $34.7 billion. This was an increase of 27% over the prior year, according to the National Philanthropic Trust (NPT). Grants to the health services sector were up 54%, while human services sector grants increased 79%. There was a significant increase in grants made to hospitals, food pantries and homeless shelters that were crucial in assisting those in need.
The Community Foundation Public Awareness Initiative noted the DAFs at 84 U.S. community foundations made $6.7 billion in grants. This was an increase of 41% over the prior year.
In addition, the NPT Donor Advised Fund Report indicated that the grant distribution rate has been approximately 20% over the past five years. In 2020, donors with good hearts and intentions increased that DAF payout rate to 23.8%.
The Members conclude, "Clearly, DAFs have become an incredibly important tool for charitable giving in communities large and small across the nation. That is why it is important to make sure we protect this important form of philanthropy from some recent policy proposals that would put limits on how they are used."
The 11 Members are concerned that proposals such as the Accelerating Charitable Efforts (ACE) Act would reduce charitable giving. The Members recognize that the ACE Act has "a positive goal to ensure that charitable organizations receive funding as quickly as possible," but are concerned that the proposals would actually reduce the flow of charitable dollars. The 11 Members "urge Congress not to consider any ill–informed or overly broad policy actions that could harm charitable giving."
This letter constitutes strong bipartisan opposition to the ACE Act, which has been introduced in both the House and Senate. The ACE Act generally limits tax benefits and may delay charitable deductions unless DAF funds are distributed within 15 years. It also changes the rules on contributions of appreciated assets to restrict the deduction to the actual cash received from the asset sale. This may delay the year of deduction reporting for nonmarketable assets. This strong bipartisan opposition to the ACE Act indicates that it is not likely to move forward in its present form.
Applicable Federal Rate of 2.0% for March -- Rev. Rul. 2022-4; 2022-10 IRB 1 (16 Feb 2022)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2022. The AFR under Section 7520 for the month of March is 2.0%. The rates for February of 1.6% or January of 1.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.