Archive for Retirement
Act now! According to the IRS IRA owners age 70½ or older have until Thursday, Jan. 31 2013 to make a direct transfer, or alternatively, if they received IRA distributions during December 2012, to contribute, in cash, part or all of the amounts received to an eligible charity.
The American Taxpayer Relief Act of 2012, extended for 2012 and 2013 the provision authorizing qualified charitable distributions (QCDs)—otherwise taxable distributions from an IRA owned by someone, 70½ or older, paid directly to an eligible charitable organization. Each year, the IRA owner can exclude from gross income up to $100,000 of these QCDs.
The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is available for the transfer. QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.
For tax-year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs.
QCDs are reported on Form 1040 Line 15. The full amount of the QCD is shown on Line 15a. Do not enter any of these amounts on Line 15b but write “QCD” next to that line.
Form 1040 – IRA owners must report 2012 QCDs made in January 2013 on their 2012 Form 1040 by:
including the full amount of the 2012 QCD (even if in excess of $100,000) on line 15a; and
not including any amount on line 15b, but writing “QCD” next to line 15b.
A 2012 QCD made in January 2013 must also be reported on the IRA owner’s 2013 Form 1040. These reporting requirements will be reflected in the 2013 Instructions for Form 1040.
Form 1099-R – IRA trustees must report distributions as follows:
Distributions made in 2012 are reported on a 2012 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc; and
Distributions made in 2013, including any 2012 QCDs made in January 2013, are reported via 2013 Form 1099-R.
IRA owners must file a 2012 Form 8606, Nondeductible IRAs, with their 2012 Form 1040 if:
the 2012 QCD was from a traditional IRA, there was basis in the IRA owner’s traditional IRA(s), and the IRA owner received a distribution from a traditional IRA in 2012, other than the 2012 QCD; or
the 2012 QCD was from a Roth IRA.
If a 2012 Form 8606 must be filed, the instructions to the form will describe how to report any 2012 QCD made in January 2013.
When adjusting to civilian life it is important to understand what is taxable and what is not taxable in regard to your pay after service to the US Military. This post is a rudimentary overview to some of those issues that were garnered from perusing the web site www.military.com which offers detailed explanations of all things military. The biggest lesson learned is that unless a retroactive disability benefit has been determined for a veteran who has elected the annuity option, you can usually rely on the 1099-R to efficiently prepare military retiree tax returns.
After retiring from the military veterans may continue to receive payments from either the Defense Finance and Accounting Service (DFAS) or the Veterans Administration (VA). Payments from DFAS are either regular, non-disability military retirement pay or military disability retirement pay.
Non-disability retirement pay is an ordinary pension-type retirement awarded to military service members upon completing service to the military. The amount of pay is based only on years of service, and all of it is considered ordinary income.
Military disability retirement pay is awarded when a service member leaves military service based on a disability. The amount of pension received is calculated based on years of service and a portion of this pay is allocated as disability. Both of these types of military retirement are paid by the DFAS. Another payment type is from the VA, which is based only on VA-rated disability percentages. The payments from the VA are never taxed.
Prior to 2004, a retiree was not permitted to receive both military retirement pay and VA disability benefits unless he forfeited the portion of his DFAS payment that was equal to the VA payment. Because the VA payment was tax free, most veterans elected this option. Since 2004, military retirees with a fifty percent or greater VA-rated disability, and at least twenty years of service, are no longer required to waive DFAS payments in order to receive VA compensation. This new law is being phased in over nine years.
In order to determine what is taxed or not taxed on DFAS payments, you must first determine whether you were a member of the military on September 24, 1975? If so then none of the disability portion of the retirement is taxable. If not, then the disability portion of length-of-service pay is taxed and the retirement pay based solely on disability is also taxed unless all pay is based on disability and the disability is the result of an armed conflict; extra-hazardous service; simulated war; or an instrumentality of war; or the veteran made an election under the Retired Serviceman’s Family Protection Plan (SFPP) or the Survivor Benefit Plan (SBP) per Reg. Sec. 1.122-1(c)(1). If this election has been made, the bottom of your account statement, under the heading “Survivor Benefit Plan (SBP) Coverage,” will indicate this election or will state, “No SBP Election is reflected on your account.”
However I have recently realized that the IRC Sec. 1.122-1 – Net Disability Exclusion, is actively being cited and used incorrectly by many tax practitioners. The www.Veteranstaxpackage.com website states: If you have a disability rating that has been confirmed by letter from the Veterans Administration and/or receive retired military pay from any branch in the military and pay taxes each year due to a high tax liability, you more than likely qualify. In reading the governing statute it is relatively easy to incorrectly assume that most partly disabled persons qualify for the net disability exclusion. Please be advised, this code section applies specifically to those veterans who, after December 31, 1965, have made an election under the Retired Serviceman’s Family Protection Plan (10 U.S.C. 1431) or the Survivor Benefit Plan (U.S.C. 1447). Taxpayers fitting in this criteria may exclude from gross income under Sec. 122(b) all amounts received as uniformed services retired or retainer pay until there has been so excluded an amount of retired or retainer pay equal to the ‘consideration of the contract.’ (Sec. 1.122-1 (2)(i)).
On a related note any veteran who elected to have part of his or her retirement pay held back to be placed into an annuity for the benefit of either his or her family (SFPP) or spouse (SBP) can reduce his or her gross income by the amount of the retirement held back. A review of code section 1.122-1(c)(1) and accompanying examples should help explain how the calculations are made. Here you will see this exclusion is a one-time adjustment and is relevant for retirees prior to January 1, 1966 who elected the annuity for their family or spouse and paid taxes on the annuity premium.
Form 1099 shows the military retiree’s net retired pay received from the Department of Defense, that is, after VA disability compensation is deducted making whatever is reported on the 1099 taxable retirement pay. The only exception to this I could find occurs when the VA retroactively awards a disability rating or increases a rating.
Taxpayers who inherit IRAs also inherit the decedent’s basis or amount invested in those IRAs, regardless of the relationship between the beneficiary and the decedent. Ideally, the decedent will have filed IRS Form 8606 (Nondeductible IRAs), showing the amount of basis in the IRA. Any remaining basis in the IRA shown on Form 8606 then becomes the beneficiary’s basis. However, if the decedent did not file Form 8606, the taxpayer has the same challenges as any IRA owner in demonstrating that he or she has basis in the IRA.
If the decedent had no basis in the IRA at the date of death, the beneficiary is taxed fully on distributions from the inherited IRA which must equal or exceed the Required Minimum Distribution (RMD). If the decedent did have basis in the IRA, the beneficiary must file Form 8606. The 1099-R issued by the payer should identify whether there is basis in the IRA.
Generally, there are several options for how to handle the inherited IRA, and the RMD rules differ for each option. Check out these three:
1. Treat the account as her own IRA by designating yourself as the account owner. If you treat the IRA as your own, you will have to take RMDs if over 70 1/2. However, you may use your own life expectancy for the RMD calculation, so theoretically less will be withdrawn from the account with each distribution.
2. Roll the IRA into your own existing IRA or qualified plan subjecting yourself again to the RMD
3. Treat yourself as the beneficiary of the IRA instead of the owner and begin taking distributions over her life expectancy.
The basis and Fair Market Value (FMV) of an inherited IRA are kept separate from your basis and FMV in your own IRA. If you elect to treat the inherited IRA as your own, the inherited IRA could be aggregated with his other IRAs on Form 8606.
Beneficiaries must begin to take required distributions from the account by December 31 following the year of death. If the beneficiaries are nonresident aliens for U.S. tax purposes, the IRA trustee may need to withhold U.S. tax on the distributions.
If the owner of an IRA dies before reaching the required beginning date for RMDs, each beneficiary can take required minimum distributions based on her own life expectancy, or take a distribution of the entire account balance by December 31 of the calendar year that includes the fifth anniversary of the decedent’s death.
Unfortunately, according to IRC 4974 if an RMD is not taken, a hefty fifty-percent excise tax may be assessed. Penalties are reported on IRS Form 5329. The IRS however may waive the fifty-percent penalty if there was a reasonable cause for failing to take the distribution such as erroneous advice given, and steps to correct the error have been taken.
If there was a reasonable cause for failure to take the RMD, the taxpayers need not pay the fifty-percent excise tax when they file their tax returns. Form 5329 instructions direct the taxpayer to complete lines 50 and 51 and enter “RC” and the amount of waiver requested on the dotted line next to line 52. This amount should be subtracted from the total, with the tax paid on the remaining amount (line 53).
The Taxpayer Inspector General for Tax Administration determined that the IRS Automated Under Reporter Program (AUR) is effectively determining the proper reporting of retirement income when Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., discloses the taxable amount of the retirement distribution. For example, for Tax Year 2007, AUR Program examiners made tax assessments totaling approximately $607.5 million on 217,811 tax returns. However, additional tax form information, if available, would improve compliance. In other words people the days of fudging on your required minimum distribution are O-V-E-R.
TIGTA recommended that the Commissioner, Wage and Investment Division: 1) revise the Form 1099-R to clarify the meaning of the Taxable amount not determined box in order to reduce taxpayer confusion and include the dates needed to identify retirement savings program distributions and transfers not rolled over within 60 days as required, and 2) establish procedures to transcribe additional lines from various tax forms.
The IRS substantially agreed with the recommendations and plans to revise the instructions to Form 1099-R to clarify taxpayer responsibilities and the amounts to report. The IRS plans to consider the feasibility and the benefits of including the dates of distributions and their respective contributions to identify distributions not rolled over within 60 days. However, TIGTA maintains this information would be useful to the AUR Program when taxpayers do not utilize direct transfers between financial institutions.
To view the report, including the scope, methodology, and full IRS response, go to:
January 17, 2012 John R. Dundon II Business Expense, Colorado Department of Revenue, Intent To Levy, Intent To Lien, International Tax, IRA, IRS Appeal, IRS Audit, IRS Centralized Insolvency, IRS Collections, IRS Enforcement, IRS Examination, IRS Levy, IRS Lien, IRS Mediation, IRS Penalties, IRS Penalty and Interest Abatement, IRS Transcript, Marijuana, Medical Expenses, Offshore account, PTIN, Retirement Attached is the summary of the IRS Stakeholder Liaison Meeting I attended on January 4th 2012 in Denver, Colorado as produced by Deborah Rodgers of the IRS. Some interesting insights were revisited. The most provocative discussion surrounded the comments made by Matthew Houtsma of District Counsel regarding the taxation of medical marijuana specifically as it pertains to cost of goods sold as well as further defining what constitutes “traffic” under IRC 280(e)
Jack Estoll, Appeals
This is Jack’s last meeting. He will retire on June 1st. Linda Alden, Appeals Team Manager will replace Jack at the PLM meetings. Welcome Linda. Appeals lost 3 processors and 1 analyst to the buyouts in December. Processing will be slowed due to those retirements; Appeals will not fill the retired positions. Examination inventory is decreasing, while Collection inventory is still increasing.
Patience Ellis, Automated Collection Site (ACS)
ACS is business as usual. We are 60 people short compared to a year and a half ago. ACS has instituted some internal process improvements. We have an abbreviated financial information statement. We are using a probe and response guide for offers in compromise, which will ask the right questions to determine if a tp wants to move forward with the offer in compromise process.
Question: How are $100,000 cases handled in ACS?
Response: With the large dollar case unit going away, there are limited things that can bring the balance down. ACS is limited with large dollar cases. Generally they will go to the field.
Question: If taxpayer is compliant and doesn’t want to wait can we writeCincinnati?
Response: You can always write toCincinnatibut process time is 45 to 60 days.
Question: Are you raising the streamline installment agreements from $25,000-$50,000?
Response: Yes, ACS Denver has been part of a pilot that has tested the increase to $50,000. Based upon the positive input and increase in efficiency, the process is projected to rollout in late January in all ACS call sites.Denverwill work Small Business cases and Seattle will work Wage and Investment cases.
Question: Will the filling of Liens change?
Response: The employees will still need to make the lien determination; there is no change to that basic process. A lien can be avoided by entering into a DDIA agreement for $25-$50k and streamline for under $25k.
Comment: 800-829-0115 telephone number gives you an estimated wait time of 15 minutes, in reality the wait time is over one hour.
Response: ACS called the number and the automated system advised at the beginning of call that hold time would be greater than 30 minutes. After being on hold for 55 minutes a representative answered and she said that this number belongs to Accounts Management W&I.
ACS’s automated line 1-800-829-3903 does not give any approximate hold time.
We will elevate this issue.
Shelley Foster, Examination
There are significant losses to resources in our 12 Western states. We are down to 90 employees in 12 states. The work plan has been reduced by 3500 returns. Business master file work has increased from 10% to 18%.
We are striving to reduce the time span between initial contact and holding the interview. Phase 1 of the audit process, with a target of completing the first interview within 45 days of the first contact. There will be a big push on this practice in the future.
We are at 95% closure on all open offshore voluntary disclosure cases within the Western Area. These are cases from the 2009 initiative. The time frame has passed for submitting disclosures for the 2011 initiative. Large Business and International has the lead on the 2011 initiative. Small Business/Self Employed will take some of the disclosure due to the projected number of disclosures. Western has dedicated 23 revenue agents to the 2011 program.
The budget is not affecting case related travel. The fallout for non-case related travel or hiring plans is not known at this time. We lost support staff throughout the Area which is impacting operations.
Question: What about the electronic software issue?
Response: This is still being worked, however, our examiners are advised to only look at information tied to the year(s) under audit which may include the month before and month after the end of the tax year.
Question: What is the number of taxpayers on the new voluntary disclosure program?
Response: Significantly more were received under this program the figures are in excess of 16,000.
Question: What are some of the audit hot topics?
Response: Hi DIF scores; audit selections based on historical audit adjustments, high income taxpayers with over $200,000 with and without Schedule Cs, over $1 million income taxpayers, business flow-through returns, and some Schedule A return projects.
Question: Time for closures?
Response: We want to close a case within reasonable time frames. It’s case-by-case based on the complexity of the return and the issues identified. Availability of records can delay the process. The guidance to managers is to get involved earlier in the process to ensure cases are move forward in a timely manner.
Question: Is it appropriate to move an audit out of state?
Response: A request to move an audit out of state can be denied for various reasons including where the taxpayer, business and records are located.
Comment: I received a proposed adjustment with the initial letter from office audit.
Response: If there is no response to the initial contact letter then we often issue a proposed audit report based on the issues classified. This would not happen unless a discontinuance of communication occurred or there was no response from the taxpayer.
Question: Is there any guidance on medical marijuana dispensary expenses?
Response: Subject is still under review by Counsel. Under federal law it is illegal so some of the expenses may be disallowed.
Comment from Counsel: There is a memo from counsel to local agents that cost of goods sold are allowable. Trafficking expenses are not allowed. Counsel mentioned the CHAMP case (128 T.C. No. 14 (2007)) where the dispensary did documentable care type work with patients. The expenses related to the care giving were allowed. Code section 280E should be followed. This is an evolving area. Agents are coming to Counsel on a case-by-case basis. The National Cannabis Industry Association memo that appeared in Tax Notes in2011 and was partially drafted by local CPA Jim Marty is not accepted by Counsel. Watch for the Harborside Health Center case in California.
Question: The salaries of the employees are being taxed but you are not allowing the deductions. Is this inconsistent?
Response: No it is not inconsistent. Behind the counter employees are deemed trafficking, therefore not deductable.
Question: Is the tour of a medical marijuana dispensary protocol?
Response: Businesses have not pushed back visits from revenue agents. It would be in their best interest to explain how the business is run. It is to get their side of the story out. Since Counsel is providing guidance we should take a look at how the business runs.
Matthew Houtsma, District Counsel
Counsel has experienced a few retirements, which included a manager. There will be a new manager coming in February. Counsel had another victory in an easement case recently. We have several easement cases on the calendar for court in March and May. We handle abusive Roth IRA cases for the whole country.
We started developing products to capture knowledge of retiring attorneys on our website.
There is a push to get summary judgment on collection due process cases. Attorneys are advised to ask the taxpayer early whether or not they object to summary judgment.
Charles Musso, Taxpayer Advocate
Local Taxpayer Advocate, Tom Sherwood is back from his detail.
Our inventory levels are down from 90 cases to about 40 cases per case advocate.
One of the changes to TAS criteria is to send amended returns back to the function.
Comment: Taxpayer Advocate received positive feedback that TAS case advocates were incredibly helpful and moved quickly through the practitioners’ issues.
Diane Sandoval, Collection
Staffing has dropped, but case related travel has not declined. Revenue officers will still be in the field. Collection focus areas include timeliness of actions, to resolve case as quickly as possible, and customer satisfaction- to communicate resolution to the taxpayer. Regarding power of attorney bypassing issue, if there is an unreasonable delay of turning over information or a pattern of no cooperation, bypass procedures will be initiated.
Taxpayers with over $100,000 balance due are encouraged to stay current in their tax matters. Also be prepared when a revenue officer knocks on the door. Resources are strained and we have many cases waiting to be worked. If there is a combative relationship between the practitioner and a revenue officer contact the group manager.
Question: The bypass issue is a more serious issue for the practitioner with the active Office of Professional Responsibility. Has there been any thought given to issuing a summons for the information that the client is not providing to the power of attorney? The practitioner doesn’t want to compromise his position with the client but is there something in the manual that suggests a summons is the next step?
Response: Warning of a bypass procedure is issued by the group manager. The actual bypass document is signed by the territory manager. Practitioner should talk to the group manager if you are issued a bypass warning letter. This is the time to consider revocation of power of attorney. When issuing a bypass letter we asked the revenue officer what they tried to do to get the information. Did they issue a summons?
Comment: Practitioner has received letters with a ghost name on them. When he calls the case has not yet been assigned.
Response: Field collection knocks on the door.
Question: If the taxpayer wants to get something resolved, can they request a revenue officer?
Response: A request for a revenue officer can be made but there are no guarantees.
Lilia Ruiz, Criminal Investigation
Our staffing is fairly steady in our states. We continue to investigate allegations of tax fraud in many areas including employment tax, money laundering, non-filers, abusive schemes, international, questionable returns,ID theft. Joel Churches is no longer the voluntary disclosure contact. Brian Thiel is the new contact. His number is 303-603-4924.
Regarding the medical marijuana issue, the US attorney’s office is proceeding cautiously across state lines. Montana is more aggressive.
Question: Can you pursue both a FBAR and criminal tax audit at the same time? Is Title 31 versus title 26 issues in conflict? Can the revenue agent do both audits or must they be separate? Revenue agent is asking for FBAR information on a civil audit.
Response (from various participants): A regular RA can do a Title 31 FBAR examination under certain circumstances. The foreign account has to be related a Title 26 violation. So, for instance, if the interest from the account was not reported on the return, the failure to report is a Title 26 violation. If everything was properly reported, then the regular RA would not be able to open up the FBAR examination. When processing to open one, a Related Statute Memorandum must be done and approved by the TM. Then, the RA can work both. Each would still be a separate case, separate activity codes, etc.
I think where the confusion lies is due to a technicality. The RA can ask anything they want about the account, but cannot ask about the FBAR form…until the Related Statute Memorandum is approved. Since it’s such a subtle item, it can really feel like an FBAR account. But if you think about it, it’s no different than what they might ask about a domestic account. Who are the signers, account balances, copies of statements, etc. It’s the form itself that throws it under Title 31.
Bessie Castro-Zepeda, Department of Revenue
At the moment we have 3000 work-as compared to 20,000 latest years. All items are under 20 days old. Practitioners are encouraged to use the online system. The phone system has a longer wait time. When you file an amended return, include original forms and backup information or your credits will be disallowed.
Question: Will there be an e-file debit account for payment on return program this year?
Response:
Question: Regarding the amnesty return information program, do you share information with federal government?
Response:
Question: What is taxpayers’ protection if rejected from the voluntary classification settlement?
Response:
Question: Contractors’ agreements? Voluntary? Department of Labor issue?
Response:
Question: Are you pursuing violators of the Colorado use tax?
Response: We only address issue in audits-not as a project.
Kristen Hoiby, Stakeholder Liaison
The revised Form 2848 and instructions issued Oct. 2011 include several changes. One of the most significant changes is for individuals who file joint returns. Each individual taxpayer will be required to submit separate Forms 2848 to the IRS Centralized Authorization File even if they are going to be represented by the same authorized representative(s). The individual(s) identified in the power of attorney will only be authorized to represent one person per Form 2848.
Question: Are there any plans to develop a simpler way to revoke a power of attorney?
Response: This question has been elevated.
Stakeholder Liaison is looking at other ways to deliver information virtually in order to deal with a lower travel budget—if practitioners know of any webinar or other systems that could be used for delivering updates, please let SL know.
There is a concentrated place for frequently asked questions and information on payment card reporting requirements on our website.
The IRS website has been redesigned. The frequently asked questions or many topics are from meetings like our PLM.
The IRS is aware some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so. Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law. This fact sheet summarizes information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties.
Beginning Jan. 3, hours of service for most IRS toll-free telephone lines will be 7:00 a.m. to 7:00 p.m. local time. This includes telephone assistance for individuals, businesses, and the Practitioner Priority Service. Hours of service for telephone assistance for exempt organizations, retirement plan administrators and government entities are not changing. As a reminder, the IRS is available online 24 hours a day, 7 days a week, for you and your clients
A six-digit Identity Protection Personal Identification Number or IP PIN is being provided to those victims of tax-related identity theft who have had their identities verified by IRS to avoid delays in processing their federal returns. If your client indicates he or she received IRS Letter 4869CS providing them with an IP PIN, please ask your client for the letter and follow the instructions provided when preparing the return.
Important: If your client received an IP PIN, please enter it on the tax return to avoid processing delays. For electronic returns, the software will indicate where to insert the IP PIN. For paper returns, enter the IP PIN in the six boxes to the right of the spouse’s occupation in the signature section. Tax professionals may send general inquiries to-IPPIN.Questions@irs.gov. IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490.
Question: Where can I get the green card information?
Question: With more practitioners being able to use the services, will it become more user-friendly? And the adjusted gross income precludes some from using e-services.
Certain tax return preparers are required to take and pass a competency test. View a summary of the return preparer requirements
Test Preparation:
Scheduling a Test:
In order to take the test, you must have a PTIN. You can schedule your test directly from your online PTIN account.
Test Logistics:
Question: Do we need to fill out the opt out form for e-file if the obvious reason is that the credit taken is not a form accepted for e-file, such as the adoption credit?
Response: Covered returns that cannot be filed electronically. Some covered returns are not currently capable of being accepted electronically by the IRS. In certain instances, the IRS has instructed taxpayers not to file some covered returns electronically. Additionally, certain covered returns cannot be e-filed if they have attached forms, schedules, or documents that the IRS does not accept electronically and these forms, schedules, or documents cannot be sent to the IRS separately using Form 8453 or Form 8453-F as a transmittal document. In any of these situations, the preparer does not need to complete and submit Form 8948. However, if the forms, schedules, or documents can be sent to the IRS separately using Form 8453 or Form 8453-F as a transmittal document, the rest of the return must be e-filed. For more information, see Form 8453, Form 8453-F, and Notice 2011-26, 2011-17 I.R.B. 720.
The Issue Management Resolution System is a streamlined, structured process that captures, develops and responds to significant national and local issues from tax practitioners and other stakeholders.
Check out this month’s IMRS Hot Issues report.
Thank you for your participation in this meeting.
Next meeting is scheduled for July 18, 2012.
Many people turning 70 see themselves in the prime of their life. A pervasive problem among this group is this idea of a Required Minimum Distribution (RMD) from their retirement savings accounts. Many people do not like to withdraw money from their retirement accounts particularly with investments still negligibly recovering from the crash of 2008. I have noticed that there is a good deal of confusion over RMD’s and many investment professionals seem to be having a problem expressing how they actually work. In fact I had an experience with one today that prompted me to research and recite the tax code to win an argument and as such I blog about it.
According to Reg. §1.401(a)(9)-8, you must have a separate determination of your Required Minimum Distribution (RMD) from each of your employer sponsored retirement plans including 401(k), profit sharing, defined benefit, etc. Each of these RMDs must be withdrawn from their respective accounts annually after you reach the age of 70 1/2.
HOWEVER with Individual Retirement Accounts (IRA’s) including SEP’s and SIMPLE’s even though you must have each separate RMD calculated by account, Reg. §1.408-8 allows you to aggregate the IRA RMDs and draw the funds out of a single IRA or combination of IRA accounts. In other words you do not have to take RMD’s from each and every IRA you own as long as you withdraw in total from any particular IRA account or combination of accounts an amount equal to the calculated RMD for the combined total of all the IRA’s.
The lesson learned here is that if you have multiple types of retirement savings investment accounts you can expect multiple RMD’s. If you have multiple IRA’s you can aggregate the RMD’s and take the withdrawal from any account or combination of IRA accounts you choose as long as the RMD threshold is met.
The benefits available to a self-employed individual in a solo 401(k) plan have increased. The self-employed individual can contribute to the solo 401(k) plan two ways:
Through elective deferrals limited to the lesser of $16,500 or 100% of the self-employed individual’s compensation for 2011 and 2012.
Through employer contributions limited to 20% of the self-employed individual’s compensation. The total of all contributions cannot exceed the lesser of 100% of the self-employed individual’s compensation or $49,000 for 2011. An additional amount of $5,500, for 2011, can be contributed if the self-employed individual has attained at least age 50 by the calendar year-end.
The self-employed individual’s compensation is defined as self-employment income after the deduction for half of the self-employment tax and the self-employed individual’s deductible contribution to the plan. Since the self-employed individual’s compensation is calculated in this manner it creates a simultaneous reduction in the maximum percentage amount the owner is able to contribute. To avoid this complicated calculation, the self-employed individual’s maximum contribution percentage can be figured by dividing the percentage amount allowed by the plan for the owner and employee by one plus the owner-employee’s contribution percentage (owner-employee % / (1 + owner-employee %)). For instance, if the self-employed individual’s plan document has a stated contribution percentage of 18% the self-employed individual’s actual maximum contribution percentage is 15.25% (18% / (1 + 18%)).
As a general rule, if the plan document states an owner-employee contribution percentage of 25%, the self-employed individual’s maximum contribution percentage is 20%. Therefore, after finding the self-employed individual’s maximum contribution percentage, using the above formula, the self-employed individual’s compensation amount is self-employment income after the deduction of half the self-employment tax.
As a side note, the self-employed individual’s deductible contribution amount is equal to the amount determined by multiplying the self-employed individual’s maximum contribution percentage by self-employed individual’s compensation (self-employment income after the deduction for half of the self-employment tax). This is the amount deducted on Form 1040 line 29, not a Schedule C deduction
I blog today about 401(K)’s from a tax perspective solely keeping in mind that my license is as an Enrolled Agent with the US Treasury. With that as a basis the benefits available to a self-employed individual in a solo 401(k) plan have increased. The self-employed individual can contribute to the solo 401(k) plan two ways:
Through elective deferrals limited to the lesser of $16,500 or 100% of the self-employed individual’s compensation for 2011 and 2012.
Through employer contributions limited to 20% of the self-employed individual’s compensation. The total of all contributions cannot exceed the lesser of 100% of the self-employed individual’s compensation or $49,000 for 2011. An additional amount of $5,500, for 2011, can be contributed if the self-employed individual has attained at least age 50 by the calendar year-end.
The self-employed individual’s compensation is defined as self-employment income after the deduction for half of the self-employment tax and the self-employed individual’s deductible contribution to the plan. Since the self-employed individual’s compensation is calculated in this manner it creates a simultaneous reduction in the maximum percentage amount the owner is able to contribute. To avoid this complicated calculation, the self-employed individual’s maximum contribution percentage can be figured by dividing the percentage amount allowed by the plan for the owner and employee by one plus the owner-employee’s contribution percentage (owner-employee % / (1 + owner-employee %)). For instance, if the self-employed individual’s plan document has a stated contribution percentage of 18% the self-employed individual’s actual maximum contribution percentage is 15.25% (18% / (1 + 18%)).
As a general rule, if the plan document states an owner-employee contribution percentage of 25%, the self-employed individual’s maximum contribution percentage is 20%. Therefore, after finding the self-employed individual’s maximum contribution percentage, using the above formula, the self-employed individual’s compensation amount is self-employment income after the deduction of half the self-employment tax.
As a side note, the self-employed individual’s deductible contribution amount is equal to the amount determined by multiplying the self-employed individual’s maximum contribution percentage by self-employed individual’s compensation (self-employment income after the deduction for half of the self-employment tax). This is the amount deducted on page 1 of Form 1040 as an adjustment to income, not as a Schedule C deduction.
Generally if payments are in exchange for partnership property, the amount received in excess of the partner’s outside basis in his/her partnership interest is taxed as capital gain. However if the payments represent a distributive share of partnership income or are deemed to be guaranteed payments, the payments are taxed as ordinary income.
According to Tax Court Memo 2009-243 Wallis v. Commissioner, retirement payments to a withdrawing partner as part of the liquidation of his/her partnership interest under §736 were considered essentially the equivalent of guaranteed payments and taxed as ordinary income. Yikes! So be careful to take the time to document.
In order to be allocated and taxed accordingly under Reg. §1.736-1(a) (2), payments for a partner’s interest should be clearly defined as distributions for partnership property or guaranteed payments.
Consideration 1: Selling your business interest outright.
When you sell your business interest to a family member or someone else, you receive cash (or assets you can convert to cash) that can be used to maintain your lifestyle or pay your estate taxes. You choose when to sell—now, at your retirement, at your death, or anytime in between. As long as the sale is for the full fair market value (FMV) of the business, it is not subject to gift tax or estate tax. But if the sale occurs before your death, it may be subject to capital gains tax.
Consideration 2: Transferring your business interest with a buy-sell agreement.
A buy-sell agreement is a legal contract that prearranges the sale of your business interest between you and a willing buyer. A buy-sell agreement lets you keep control of your interest until the occurrence of an event that the agreement specifi es, such as your retirement, disability, or death. Other events like divorce can also be included as triggering events under a buy-sell agreement. When the triggering event occurs, the buyer is obligated to buy your interest from you or your estate at the FMV. The buyer can be a person, a group (such as co-owners), or the business itself. Price and sale terms are prearranged, which eliminates the need for a fi re sale if you become ill or when you die. Remember, you are bound under a buy-sell agreement: You can’t sell or give your business to anyone except the buyer named in the agreement without the buyer’s consent. This could restrict your ability to reduce the size of your estate through lifetime gifts of your business interest, unless you carefully coordinate your estate planning goals with the terms of your buy-sell agreement.
Consideration 3: Grantor retained annuity trusts. A more sophisticated business succession tool is a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT). GRAT/GRUTs are irrevocable trusts to which you transfer appreciating assets while retaining an income payment for a set period of time. At either the end of the payment period or your death, the assets in the trust pass to the other trust beneficiaries (the remainder beneficiaries). The value of the retained income is subtracted from the value of the property transferred to the trust (i.e., a share of the business), so if you live beyond the specified income period, the business may be ultimately transferred to the next generation at a reduced value for estate tax or gift tax purposes.
Consideration 4: Private annuities.
A private annuity is the sale of property in exchange for a promise to make payments to you for the rest of your life. Here, you transfer complete ownership of the business to family members or another party (the buyer). The buyer in turn makes an unsecured promise to make periodic payments to you for the rest of your life (a single life annuity) or for your life and the life of a second person (a joint and survivor annuity). A joint and survivor annuity provides payments until the death of the last survivor; that is, payments continue as long as either the husband or wife is still alive. Again, because a private annuity is a sale and not a gift, it allows you to remove assets from your estate without incurring gift tax or estate tax. Until recently, exchanging property for an unsecured private annuity allowed you to spread out any capital gain realized, deferring capital gains tax. However, this tax benefit has generally been eliminated.
Consideration 5: Self-canceling installment notes.
A self-canceling installment note (SCIN) allows you to transfer the business to the buyer in exchange for a promissory note. The buyer must make a series of payments to you under that note. A provision in the note states that at your death, the remaining payments will be canceled. SCINs provide for a lifetime income stream and avoidance of gift tax and estate tax similar to private annuities. Unlike private annuities, SCINs give you a security interest in the transferred business.
Consideration 6: Family limited partnerships.
A family limited partnership can also assist in transferring your business interest to family members. First, you establish a partnership with both general and limited partnership interests. Then, you transfer the business to this partnership. You retain the general partnership interest for yourself, allowing you to maintain control over the day-to-day operation of the business. Over time, you gift the limited partnership interest to family members. The value of the gifts may be eligible for valuation discounts as a minority interest and for lack of marketability. If so, you may successfully transfer much of your business to your heirs at significant transfer tax savings.
Ack: California Society of CPAs
