December is an important month for IRA and 401(k) owners who are over age 73. The Internal Revenue Service (IRS) reminds taxpayers over age 73 to take a required minimum distribution (RMD) by December 31. Because some retirement plan custodians take time to process RMD requests, you should start your IRA or 401(k) withdrawal by mid-December.

There is an exception to the December 31 deadline for traditional IRA owners who turned 73 in 2024. Those individuals may delay their first RMD until April 1, 2025. However, if they delay the first RMD, they will also need to take a second RMD by December 31, 2025.

RMDs are generally required for most qualified retirement plans. This rule applies to three types of IRAs. Specifically, they apply to Individual Retirement Arrangements, Simplified Employee Pension (SEP) IRAs and Savings Incentive Match PLan for Employees (SIMPLE) IRAs.

RMDs also apply to traditional 401(k), 403(b) and 457(b) plans. An exception to the RMD withdrawal requirement is a Roth IRA, Roth 401(k) or Roth 403(b) – there are no distribution requirements for these plans if the original owner is living.

Most taxpayers take the RMD based upon the Uniform Lifetime Table in IRS Pub. 590-B. This table assumes there is a beneficiary 10 years younger than the IRA owner and calculates a distribution amount based on both ages. If the IRA owner has a spouse more than 10 years younger, a special calculation is applied.

Owners of multiple IRAs must calculate the RMD for each plan. However, the owner can elect to withdraw the total RMD amount from any IRA plan.

Some employees over age 73 who are still working and are not major owners of a business may be able to defer RMDs until after retirement. You should consult your tax advisor to see if you think this exception applies to you.

Many online calculators are available to help determine your RMD. Most large financial companies offer an online determination of the correct amount. RMDs start at approximately 3.8% of your prior year December 31 IRA balance.

The RMDs increase each year after age 73. Your RMD is approximately 4.2% at age 76, 5.0% at age 80, 6.3% at age 85, 8.2% at age 90 and 11.2% at age 95.

Editor’s Note: An excellent way to fulfill an RMD is to give part or all of the IRA payment to a qualified charity. Qualified charitable distributions (QCDs) are available for individuals over age 70½ and may fulfill part or all of your RMD. The QCD is a transfer directly from the IRA custodian to a qualified charity. Up to $105,000 may be transferred in 2024. If you are planning ahead, the 2025 QCD limit will be $108,000. It is important to act quickly if you plan to make a QCD gift this year. The QCD must be completed by December 31, 2024.

Holiday Season Social Media Scams

During this holiday season, millions of Americans are on social media. They are sharing posts of family and friend gatherings and times of holiday cheer.

The Internal Revenue Service (IRS) and Security Summit partners highlight the problem of holiday social media with "wildly inaccurate tax claims." The claims include "outlandish promises" to inflate refunds.

IRS Commissioner Danny Werfel noted, "The growth of the bad tax advice on social media continues to grow, luring unsuspecting taxpayers into filing bad tax returns. We urge people to do some research before falling for these scams."

The IRS has seen an increasing number of new scams and bad advice on social media. Too many taxpayers have fallen for the claims that promoters will "magically enrich" individuals.

Many of the scams generate false credits or other schemes to increase tax refunds. Some scammers have a criminal profit motive, but many others are simply seeking attention.

Commissioner Werfel continued, "Common wisdom dictates that if it sounds too good to be true, it often is, and that is especially with some of the crazy ideas about taxes being spread on social media. Social media platforms are rife with influencers making claims about tax credits or deductions that stretch the truth or are outright lies, aimed at gaining themselves clout or pushing up their views."

There are five specific scam tactics that professional advisors should warn their clients about.

1. Self Employment Tax Credit— Promoters claim you can file IRS Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals and claim a credit of up to $32,000. This form was available during the COVID-19 pandemic and did allow credits in the years 2020 and 2021. It is not available for current tax returns.
2. Household Employment Taxes— This is another variation of a similar scheme. Taxpayers are told that they can "invent” household employees, file Schedule H, Household Employment Taxes and claim a large refund. This refund is based on fraudulent wages that were never paid.
3. Fuel Tax Credit— There is a fuel credit for off-highway contractors, farmers and ranchers. This applies only to vehicles that are not used on public highways. It does not apply to individual taxpayers and their personal vehicles.
4. Inflated Income and Withholding— The promoter instructs the taxpayer to file a false IRS Form W-2, Wage and Tax Statement. The taxpayer inflates both the income and withholding figures and then claims a refund of as much as $10,000.
5. Claim of Right— Taxpayers are encouraged to file their tax return with a reported deduction for the entire amount of their income. The deduction is claimed to be a "necessary expense for the production of income." This is misleading and the deduction will be disallowed.

Security Summit partners urge taxpayers to be particularly on guard during the holiday season. If taxpayers have questions about a tax credit, they can review the resources on IRS.gov or ask a qualified tax professional.

During this busy holiday season, individuals who are planning for their tax filing in the first quarter of 2025 should obtain their tax advice from IRS social media channels or trustworthy and vetted tax professionals. The IRS has extensive social media and YouTube information on all of these areas.

Phony "Charitable LLC" Deductions

On December 4, 2024, the Internal Revenue Service (IRS) warned taxpayers that there are hundreds of phony deductions based on a strategy known as the "Charitable LLC."

The promoters will usually target high-income individuals. Those who fall prey to this scheme are often audited. They will owe back-taxes, penalties and interest. Individuals who are regularly involved in these schemes have also faced fines and criminal prosecutions.

There are many legitimate charitable deductions taken each year by owners of corporations, partnerships, LLCs and other business entities. These are appropriately deductible if the owner follows the correct substantiation. However, fraudsters have been luring an increasing number of high-income taxpayers into the abusive use of the Charitable LLCs.

The "Charitable LLC" scheme usually starts with a promoter who convinces the target to hire the fraudster and pay for the creation of the LLC. After the LLC is created, the owner then gifts a substantial non-voting membership interest to a qualified charity. Some promoters have specific appraisers to determine the value of the reported gift and sign IRS Form 8283.

However, many promoters promise the LLC owner that he or she can legally access the cash in the entity and use it for personal purposes. Some of the plans also involve an "exit strategy" that allows the owner to repurchase the charitable interest at a highly discounted price.

There are multiple red flags that should be used to guard against falling victim to this scam. Many promoters promise that you will be able to grow wealth in a "tax-free environment." The promoter will create a new LLC or business entity with no active business purpose. The LLC may loan cash or other assets back to the taxpayer and the charity typically has no control to stop these loans.

While this is an abuse of the LLC formalities, a taxpayer may intend to use the cash for personal purposes. Many LLCs will also purchase life insurance policies with the primary benefit to the family of the LLC owners. Finally, the ability to repurchase the LLC units at a bargain price and the use of appraisers who inflate the deductions are typical parts of the scam.

The IRS emphasizes that gifts of partnership or LLC interests may be deductible if the appropriate procedures are followed. For gifts of $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the charity. The acknowledgment should include a statement along the lines of: "No goods or services were provided and the charity has exclusive legal control of the gifted assets."

For gifts of property valued at over $5,000, a qualified appraisal by a qualified appraiser is required. Both the appraiser and a representative of the charity must sign IRS Form 8283, Section B. If the claimed deduction is $500,000 or more, a complete copy of the qualified appraisal must be attached to the return.

The IRS emphasizes that there have been several promoters of these schemes who have been convicted and are currently serving sentences in federal prison. IRS Form 14242, Report Suspected Abusive Tax Promotions or Preparers can be used if a professional advisor believes there is a fraudulent scheme.

Applicable Federal Rate of 5.0% for December: Rev. Rul. 2024-26; 2024-49 IRB 1 (15 November 2024)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2024. The AFR under Sec. 7520 for the month of December is 5.0%. The rates for November of 4.4% or October of 4.4% 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.”