Washington News

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

It is helpful for owners of traditional IRAs to understand how to complete a QCD, what is required to report a QCD on your tax return and the required 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 distributions from a traditional IRA are generally taxable, the QCD payouts will not be included for income tax purposes if they are paid directly to a qualified nonprofit. Typically, a QCD is made through a check payable to the charity. An electronic payment or a check payable to the IRA owner does not qualify as a QCD. The owner must be age 70½ or older and the 2025 limit is $108,000. If spouses are both over age 70½, then the $108,000 per person limit may allow a couple to distribute up to $216,000 per year to charity. Because QCDs are not taxable, there is no charitable deduction.
    
2. How to Report Your QCD – Your QCD must be reported on your 2025 federal income tax return. You can expect to receive an IRS Form 1099-R from your IRA custodian. This will show the traditional IRA total distribution amount in Box 1. In 2025, the IRS introduced a new QCD code to be used on Form 1099-R. The QCD amount will be noted as Code Y in Box 7 of Form 1099-R. Generally, you will report the IRA distribution on Line 4 of IRS Form 1040 (the final IRS 2025 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. It remains a best practice to write "QCD" next to Line 4b. If only part of the IRA distributions is a QCD, the taxable portion is normally entered on Line 4b. Not all custodians may be ready for the Code Y in Box 7 change in 2025 and the IRS has not required this reporting for 2025. Your custodian may use an older version of Form 1099-R that does not include Code Y in Box 7.  
    
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 before filing your tax return. In some cases, the custodian directing the QCD does not add a note stating who the donor is, so you may want to reach out to the nonprofit to verify it has been received and provide your contact information for the acknowledgement. This acknowledgment should state the date, your name and the amount of the QCD. The acknowledgment must also indicate that you have received "no goods or services in exchange for the gift." You should retain the acknowledgment with your other 2025 tax records.

Editor's Note: Many individuals will fulfill part or all of 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 as some IRA custodians may take time to process the transfer. If a donor has the right to make distributions from his or her traditional IRA through a checkbook, they can send the check directly to the charity. Donors should allow sufficient time for the charity to deposit the check and for the financial institution to process the check. The transfer of QCD funds must be completed by December 31, 2025.

IRA and 401(k) Contributions in 2026

In IRS Notice 2025-67; 2025-49 IRB 1, the IRS announced 401(k) and IRA contribution limits for 2026. The IRA limit is $7,500 in 2026. Individuals over 50 may make a catch-up contribution of $1,100, for a total transfer of $8,600.

Traditional IRA contributions from earned income are tax deductible. Another tax benefit of traditional IRAs is tax-free growth. If a taxpayer is covered by a qualified retirement plan at their workplace, the IRA deduction may be reduced or phased out.

1. Single Taxpayers with Workplace Plan – IRA contributions for single taxpayers begin phasing out for individuals with incomes more than $81,000.
    
2. Married Couple with Workplace Plans – For a couple with joint income who are covered by a workplace plan, IRA contributions begin phasing out at income of more than $129,000.
    
3. Married and No Workplace Plan – If one person has no workplace plan and their spouse is covered in his or her workplace, the phaseout on a joint return begins at income more than $242,000.

A Roth IRA is funded with after-tax income. It grows tax free and most distributions are 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 IRS also announced increased Roth IRA phaseout limits in 2026.

1. Single Individuals – The Roth IRA phaseout for single individuals next year is between income of $153,000 to $168,000.
    
2. Married Couples – For married couples, the Roth IRA phaseout is for income between $242,000 to $252,000.

Many businesses offer 401(k) plans while most nonprofits provide a 403(b) plan. The 2026 limit for an employee contribution to a 401(k) or 403(b) plan is $24,500. Generally, employees over 50 may make a catch-up addition of $8,000, for a total transfer limit of $32,500. An exception is available for employees 60 through 63, who are allowed to make a catch-up contribution of $11,250.

If an employer offers both a traditional 401(k) and a Roth 401(k) plan, the employee may allocate contributions 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 2026 will be $111,000. The limit for a 2026 IRA QCD to life income gift, which can be for a charitable gift annuity (CGA) or charitable remainder trust (CRT), will be $55,000. This gift remains a single tax year election that can be utilized only once-in-a-lifetime.

Editor’s Note: Many employers match their employees’ 401(k) contributions. This is a good way to encourage employee participation in the 401(k) plan. The employer match is used to fund an employee’s traditional 401(k) account. The employee may still make contributions to a Roth 401(k) account up to the $24,500 or $32,500 limit.

Conservation Easement Penalty Rejected

In Bayou Serpent Property LLC v. Commissioner; No. 4659-25, the Tax Court determined that summary judgment in favor of the partnership was appropriate. The outcome of this case was due to the untimely filing of the IRS Notice of Final Partnership Adjustment (FPA). The filing was considered untimely based on the recent holding in JM Assets LP v. Commissioner, 165 T.C. No. 1 (2025), which found that the deadline to issue the FPA is 270 days “after the date on which everything required to be submitted to the Secretary pursuant to such section is so submitted.”

Bayou Serpent Property, LLC (Bayou) was involved in a gift of a conservation easement on December 20, 2019. The Internal Revenue Service (IRS) audited the claimed conservation easement deduction of $76.5 million, issued a notice of proposed partnership adjustment and engaged in litigation with Bayou. Bayou moved for summary judgment on the basis the IRS untimely filed the FPA, rendering it invalid.

In JM Assets LP v. Commissioner, the Court noted there was a discrepancy between Sec. 6235(a)(2) and Reg. 301.6235-1(b)(2), where the regulation extended the statutory period and thus it was an invalid time period. The Court held that the statute’s language of 270 days “after the date on which everything required to be submitted” was plain and the “regulation must give way to the statute.” The regulation’s language extended the statute of limitations beyond the statute to 270 days after the “date on which everything required to be submitted.”

Bayou argued that the 270-day statute of limitations started running on February 8, 2024, which was the date all the documents were submitted, and no further information was requested. The IRS issued the FPA on January 13, 2025.

Bayou submitted all requested information on February 8, 2024, no further information was provided nor requested by the IRS. The Court agreed with Bayou that the 270-day period ended on November 4, 2024. The Court noted that the IRS did not oppose the Motion for Summary Judgment.

Therefore, the Tax Court held the FPA was issued more than 60 days after the 270-day statute of limitations. The unopposed Motion for Summary Judgment was granted and the case was dismissed.

Editor's Note: The conservation easement deduction in this case is a limited win for the taxpayer. The win was based solely on the expiration of the statute of limitations.

Applicable Federal Rate of 4.6% for November: Rev. Rul. 2025-21; 2025-45 IRB 1 (15 October 2025)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2025. The AFR under Sec. 7520 for the month of November is 4.6%. The rates for October of 4.6% and 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 2025, pooled income funds in existence less than three tax years must use a 4.0% 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.”