Category Archives: Tax Planning

I Inherited a Roth IRA. Now what?

My Comments: More and more people have Roth IRA accounts. A common question about retirement is whether to draw money from their Roth IRA first or take money from their non-Roth retirement accounts first.

It depends. Any money not yet taxed is going to get taxed. Period. The Roth IRA money comes out tax free; the taxes have already been paid. If your non-spouse beneficiary is in a high tax bracket, it may be better for them to get it in the form of Roth money.

Most beneficiaries are simply happy to get unexpected money. If they have to pay tax, it’s not an issue. You can run a million scenarios and when all is said and done, it makes little difference in the grand scheme of things.

June 28, 2013 by Dan Moisand at MarketWatch.com

When you inherit retirement plans, the rules for how those funds are taxed and the options available to the beneficiary vary based on the type of account and whether the beneficiary is a spouse or not.

Today I explain to a non-spouse beneficiary some of the rules that apply to inheriting a Roth IRA. I also answer a reader question about one way to increase her Social Security payments even though she started taking benefits early at a reduced rate.

Q. My Dad is 74, and he has a ROTH IRA as well as a 401(k). When he passes away, my mom will inherit the retirement accounts, and then we his sons will. My question is can I, as a non spouse beneficiary, rollover the ROTH IRA into my personal ROTH IRA? — C.B.

A. No you cannot roll the Roth IRA money into your personal Roth IRA. Only spouses may do that. If your mother rolls the Roth IRA into her own Roth IRA, it is treated as though she had always been the owner of those funds, so those funds will continue to be exempt from Required Minimum Distributions (RMD), an attractive feature of Roth IRA’s. Also, she would name the beneficiaries. It is important to check that the beneficiary designations on all accounts match the wishes of the current account owners.

The beneficiary designation trumps anything written in one’s will or trust agreements. I saw a case in which the wife had a small IRA that named her church as primary beneficiary. When her husband died, she rolled his account into her IRA but did not change her beneficiary designation. When she passed away, the church was entitled to all of the funds. This was an unpleasant surprise to the beneficiaries.

You have two basic options as a non-spouse inheritor; take a lump sum or, transfer the funds into an account titled as an “inherited Roth IRA.” Taking the lump sum is pretty simple. The lump sum you receive is not subject to tax. Once you get your check, if you wish to invest any part of it, it will be taxed just like funds in any other non-retirement account.

Most inheritors with an eye on the long term prefer to rollover the money to an inherited Roth IRA. The assets continue to grow untaxed, you can choose your own beneficiaries and withdrawals are tax free.

You cannot, however, let all the account just sit in the inherited Roth IRA. By Dec. 31 of the year after the year in which the owner died, you must have begun taking required minimum distributions (RMD) annually. If you don’t make the RMD by that deadline, you will need to have withdrawn all the assets by the end of the fifth year after the year of death.

The RMD you will be subject to is based upon the IRS’s single life expectancy table. The value of the account on Dec. 31 of the year death is divided by the beneficiary’s life expectancy listed on that table to obtain the first RMD amount. For example, if you are 55 at the time, the table says your life expectancy is 29.6, you would divide the Dec. 31 value by 29.6. In the following year, you use the following Dec. 31 value and divide by one less year (28.6). The next year, use the value as of the next Dec. 31 and 27.6.

You mentioned you had brothers. There is one more step to consider. If your mom lists more than one person as beneficiary, you should have the shares of the account separated into individual inherited Roth IRAs by Dec. 31 of the year following the year of death. This enables each beneficiary to use their own life expectancy. Otherwise, distributions are calculated based upon the oldest beneficiary’s age causing distributions to occur faster than necessary.

This can be particularly important with non-Roth retirement money like a 401(k) in which distributions are taxable. Generally, beneficiaries wish to have the smallest RMD’s possible in order to control taxation better. A beneficiary can always take more than the RMD but the lower the minimum, the more flexibility in tax planning.

Again, make sure all the beneficiary designations on all accounts reflect the owner’s wishes. It should be noted that the rules are different if any of the beneficiaries are beneficiaries through a trust that is named as beneficiary of a retirement account. Naming a trust can be helpful but if not done correctly, can result in an acceleration of taxation.

Also, to accommodate an account holder’s specific wishes, many attorneys prepare customized beneficiary designations. Not all 401(k) plans will accept customized beneficiary designations so many will roll those funds into a traditional IRA.

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What Are the Odds the IRS Will Audit Your Tax Return? And What Should You Do If It Does?

income taxMy Comments: There is a significant difference between avoiding taxes and evading taxes. Not less an authority figure than a former Supreme Court justice expressed that “…there is no obligation to pay more in taxes than absolutely necessary”. But evading taxes will perhaps land you in jail.

That being said, the IRS is NOT going to tell you about every loophole or allowable strategy in the play book to help you pay less tax. Their job is to make sure that everyone earning money files a tax return and if a tax is dues, was it paid on time.

It’s up to us to figure out what we can do to avoid paying extra money in taxes than is absolutely necessary. One can argue that pushing the envelope is OK until you are caught. I’m not going to go there, but what follows is one element in the games we play.

By Kevin McCormally, May 31, 2016

Tax audits are in the news more than usual this year, since Donald Trump says the fact that he’s being audited by the IRS prevents him from releasing his returns as part of his quest for the presidency.

But if being audited blocked the release of a tax return, we never would have seen Barack Obama’s or George W. Bush’s or Bill Clinton’s or any other recent president’s. Even Richard Nixon released his returns while they were being audited (the fact that that return led to the House Judiciary Committee approving an Article of Impeachment against Nixon is another story).

Why? Because when it comes to the odds of being audited, one thing is crystal clear: If you’re living in the White House, your odds are 100%. The returns of the president (and the veep) get the going over every year, as required by section 4.2.2.11 of the Internal Revenue Manual.

As the head of the IRS, John Koskinen, told us earlier this year, “So, you know, anyone running for president or who’s going to be president can look forward to having their tax returns audited every year.”

Assuming you’re not aiming to run the free world, though, what are your odds of being audited . . . and what should you do if you are?

This is the quintessential good-news/bad-news story.

The good news: If you’re worried that the tax return you just sent to the IRS will be audited, breathe easy. Koskinen is telling anyone who will listen that budget cuts have severely limited the agency’s ability to review returns for accuracy. Audit rates for individual tax returns fell last year to the lowest level in a decade … and will fall even more this year.

The bad news: If you’re an honest taxpayer, you’ll be disappointed to learn that the IRS says that every $1 it spends on audits and other “enforcement” activities brings in $4 to the U.S. Treasury. Falling audit rates mean dishonest taxpayers will be allowed to keep billions of dollars they ought to be paying in taxes.

But just what are the chances you’ll be audited, that your Form 1040 or 1040-A or 1040-EZ will be plucked from the 140 million-plus returns for a going over?

Clearly, the odds are reassuring. The vast majority (more than 99%, in fact) of individual income tax returns skate safely past the IRS audit machine.

Better news: The 1-in-119 chance of being called on the carpet vastly overstates the severity of the situation. More than three-quarters of all audits are handled by mail, not by mano a mano combat with an IRS agent during an office examination or a field audit. And if your return doesn’t include income from a business, rental real estate or a farm, or employee business expense write-offs or earned income credit, the basic 1-in-119 chance of being challenged dwindles to about 1-in-330.

Another piece of rarely reported good news: Each year, tens of thousands of taxpayers walk out of an audit with a check from the government. In 2015, for example, almost 40,000 audits resulted in refunds totaling nearly $1.1 billion. And 9% of field audits and 12% of correspondent audits end with the conclusion that everything is hunky-dory: no change in what the taxpayer owes Uncle Sam.

The 1-in-119 chance of being audited is the overall average from last year. As noted above, there’s an even smaller chance this year. But in any year, your personal odds turn on the kind of return you file and the type of income you report.

Our calculator, based on official IRS data on returns audited in 2015, will give you a good idea of the odds that your personal Form 1040 (or 1040-A or 1040-EZ) will be selected for review—either by mail or in person. And, remember, even if it is, there’s a decent chance you’ll walk away unscathed or be one of the lucky ones whose audit results in a refund.

With few exceptions, of course, the IRS doesn’t randomly choose which returns to audit, although random reviews are used to help the IRS calibrate the computers that identify the juiciest targets.

Over the next few months, the IRS will be plugging data from more than 140 million 2015 tax returns into a computer that scrutinizes the numbers every which way and ponders how the picture you paint of your financial life jibes with what it knows about other taxpayers. The computer tries to spot returns that are most likely to produce extra tax if put through the audit wringer. The computer’s choices are reviewed by a human being who can overrule them if, for example, an attachment to your return satisfactorily explains the entry that set the computer all atwitter. Short of such a veto, your name will go on the list.

Even if your return survives the computer’s scrutiny, you’re not necessarily safe. You may have listed an investment in a tax shelter the IRS is particularly interested in, for example, or the agency might decide to take a closer look at your return because it smells of the latest scam du jour identified by the IRS.

And there’s always the chance that someone has fingered you as a tax cheat. The IRS encourages such tips and even pays a bounty for leads that pay off in extra tax.

TAX ESSENTIALS

income taxMy Comments: I think I found this article published in Medical Economics some months ago. I apologize for my inability to provide accurate sourcing. That aside, we have ZERO obligation to pay more in taxes that absolutely necessary.

Just remember, the IRS has a responsibility to collect taxes. It’s up to us to figure out legitimate ways to NOT pay taxes. The burden of compliance is on us as taxpayers, so don’t expect the IRS to wave any flags that say “no taxes are necessary”. It’s not going to happen. Here’s the text I found:

Since 2001, the tax code has undergone 4,680 changes—an average of more than one change per day. Even worse, physicians are paying more in taxes. Because of these trends, intelligent tax preparation has become essential, not optional.

To help, some changes in U.S. tax laws are highlighted in this article. This is by no means a complete list, but identifying strategies for dealing with these areas represents a big step to creating to a solid tax strategy.

On New Year’s Day 2013, the Bush-era tax cuts expired. Now the rich pay more (or are supposed to.) The top tax rate for individuals earning $400,000 or more, and married couples filing jointly earning $450,000 and up, is 39.6%. This is the highest rate in nearly 15 years.

Capital gains rates also increased under the same “fiscal cliff” deal. The wages of individuals earning more than $200,000 ($250,000 for married couples), now are subject to Medicare surtax. This will be tacked on to wages, compensation, or self-employment income over that amount. The surcharge is .9%.

There is not much to be done about these increases, which were a long time coming and received bipartisan support. While taxes can’t be eliminated altogether, they can be significantly reduced with proper preparation. Such preparation may include structured trusts, limited partnerships and other legal entities.

Another tax is the net investment income tax, under which individuals earning $200,000 ($250,000 for couples) may now owe more. Taxpayers with net investment income and modified adjusted gross income (AGI) will likely pay more. Net investment income encompasses: income from a business, dividends, capital gains, rental and royalty income, and/or interest.

Depending on any business or investment activities outside your practice, there may be circumstances where you owe more. Be sure to check with a professional to assure all income outside of your medical practice is accounted for appropriately. Please note that wages, unemployment compensation, operating income from a non-passive business, Social Security, alimony, tax-exempt interest, self-employment income, and distributions from certain Qualified Plans are excluded—for now.

In addition, personal exemptions (PEPs) for high earners may be eliminated. The phase-out of the personal exemption affects individuals with adjusted gross incomes of more than $254,200 and $305,050 for married taxpayers. They end completely for individuals who earn $376,700 or more and $427,550 for married taxpayers. While PEPs are generally a drop in the bucket for high earners—it was only $3,950 in 2014—it’s a lost deduction that can add up over several years.

Interestingly, while the definition of marriage is decided by individual states, the Internal Revenue Service recognizes a legally married same-sex couple in all 50 states, no matter what their legal status is in their home state. This can affect tax, estate, legal, and charitable planning.

Savvy estate planning for all married couples and individuals may involve various types of trusts, such as a charitable-lead trust. When created and structured properly, the charitable-lead trust earns an immediate tax deduction, avoids taxes on appreciated assets, and may provide an inheritance for heirs later.

A charitable-remainder trust potentially avoids capital gains taxes on appreciated assets, allows you to receive income for life, and provides a tax deduction now for your future (posthumous) charitable contribution. For large, significant charitable gifts, donating appreciated stocks or mutual fund shares (provided you’ve owned them for over 366 days) is a way to boost your largesse.

Under IRS rules, the charitable contribution deduction is the fair market value of the securities on the date of the gift—not the amount you paid for the asset. And there is no tax on the profit. This only works for assets that have appreciated in value, not for those on which you have a loss.

Now for the good news: You may be able to benefit from Tax-Free Education Reimbursements for continuing medical education (CME) via a Section 127 educational assistance plan, depending on the way your practice (or your employer’s practice) is structured.

If you are an employee and your employer does not pay for the CME, it is considered a miscellaneous itemized deduction subject to the 2% AGI limitation. Under this scenario it is better to negotiate to have your employer pick up the costs. Then it is a deduction for the employer and nontaxable to the employee.

If your practice is a sole proprietorship or a single-member LLC, than the cost should be deducted on your Schedule C, and is a deduction from AGI (and self-employment tax). If the practice is a multi-member LLC, partnership, or S corporation, it is best for the entity to pay the expense. Doing so reduces the flow through income from the entity and effectively reduces AGI.

Under the partnership scenario (or an LLC taxed as a partnership), if the operating agreement states that the expense must be paid by the partner/member and that the entity will not reimburse the costs, then the expense can be deducted on Schedule E of your tax return (thus reducing your AGI). This treatment is not available to an S corporation.

The conversion privilege for Roth individual retirement accounts (IRAs) continues. Converting a traditional IRA into a Roth account is treated as a taxable distribution from the traditional account with the money going into the new Roth account. The result of this conversion is a larger federal income tax hit (a larger state tax hit is also likely).

But the benefits may outweigh the extra money owed. At age 59½, all income and gains accrued in the Roth account can be withdrawn free from federal income taxes, provided at least one Roth IRA has been open for more than five years.

In the event that future federal income tax rates rise, the Roth IRA’s balance isn’t affected. Provided the account is over five years old, if you die, your heirs can use the money in your Roth account without owing any federal income tax. And unlike traditional IRAs, Roth IRAs are exempt from required minimum distribution (RMD) rules applied to other retirement accounts, including traditional IRAs.

Under the RMD rules, you must start taking annual withdrawals after age 70½ and pay the resulting taxes. But you can leave Roth IRA balances untouched for as long as you wish and continue earning federal-income-tax-free income and capital gains. And there is no income restriction on Roth conversions: Everyone, no matter their income, can do them.

Selling a home may be excluded from tax. How? Suppose an individual sells a primary residence. She or he may exclude up to $250,000 of gain. A married couple may exclude up to $500,000.

There are a few caveats, however. Principal ownership of the property, for at least two years during the five-year period ending at the sale date, is required. Also, the property must have been a primary residence for two years or more during the same five years. The maximum $500,000 joint-filer exclusion requires at least one spouse to pass the ownership test; both need to pass the use test.

Regarding previous sales, if gains from an earlier principal residence sale were excluded, there is typically a wait of at least two years before taking advantage of the gain exclusion provision again. Married joint filers may only take advantage of the larger $500,000 exclusion if neither spouse claimed the exclusion privilege on an earlier sale within two years of the ¬latter.

There is also positive news regarding the dependent care credit. If you employ child care for one or more children under the age of 13 so that you can work (or, if you’re married, you and your spouse can work), you may be eligible for this credit. Affluent families receive a credit equaling 20% of qualifying expenses of up to $3,000 for one child, or, up to $6,000 of expenses for two or more. The maximum credit for one child is $600; for two or more it’s $1,200.

The credit is also available to those who incur expenses taking care of a person of any age who is physically or mentally unable to care for themselves (i.e., a disabled spouse, parent, or child over the age of 13).

“Borrowing” from Retirement Savings

house and pigMy Comments: There is a fundamental truth to be gleaned from demographics. A great majority of us live well into our 80’s and beyond. And given the nature of our society, it’s better to have more money than less money.

Accounts like an IRA, or a 401k or any number of other titles, implies that money in those accounts has not yet been taxed. It’s an incentive given us by the IRS to accumulate a pile of money to use down the road. According to this article, over 30 million of us have tapped into our retirement savings early.

It’s rarely a good thing to remove money from these accounts until you have stopped working for money, ie ‘retired’, since your chances of putting it back and having enough when you cannot work is typically slim to none. That so many have reached into their accounts suggest that our children and grandchildren are going to be thoroughly pissed off when they have to come up with the money needed to keep us alive.

by Tyler Durden on 09/24/2015

The ongoing oligarch theft labeled an “economic recovery” by pundits, politicians and mainstream media alike, is one of the largest frauds I’ve witnessed in my life. The reality of the situation is finally starting to hit home, and the proof is now undeniable.

Earlier this year, I published a powerful post titled, Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery,” which highlighted how a growing number of Americans have been taking out unconventional loans, not simply to overcome an emergency, but for everyday expenses. Here’s an excerpt:

Families’ savings not where they should be: That’s one part of the problem. But Mills sees something else in the recovery that’s more disturbing. The number of households tapping alternative financial services are on the rise, meaning that Americans are turning to non-bank lenders for credit: payday loans, refund-anticipation loans, pawnshops, and rent-to-own services.

According to the Urban Institute report, the number of households that used alternative credit products increased 7 percent between 2011 and 2013. And the kind of household seeking alternative financing is changing, too.

It’s not the case that every one of these middle- and upper-class households turned to pawnshops and payday lenders because they got whomped by an unexpected bill from a mechanic or a dentist. “People who are in these [non-bank] situations are not using these forms of credit to simply overcome an emergency, but are using them for basic living experiences,” Mills says.

Of course, it’s not just “alternative financial services.” Increasingly desperate American citizens are also tapping whatever retirement savings they may have, including taking the 10% tax penalty for the privilege of doing so. In fact, 30 million Americans have done just that in the past year alone, in the midst of what is supposed to be a “recovery.”

From Time:
With the effects of the financial crisis still lingering, 30 million Americans in the last 12 months tapped retirement savings to pay for an unexpected expense, new research shows. This undercuts financial security and underscores the need for every household to maintain an emergency fund.

Boomers were most likely to take a premature withdrawal as well as incur a tax penalty, according to a survey from Bankrate.com. Some 26% of those ages 50-64 say their financial situation has deteriorated, and 17% used their 401(k) plan and other retirement savings to pay for an emergency expense.

Two-thirds of Americans agree that the effects of the financial crisis are still being felt in the way they live, work, save and spend, according to a report from Allianz Life Insurance Co. One in five can be called a post-crash skeptic—a person that experienced at least six different kinds of financial setback during the recession, like a job loss or loss of home value, and feel their financial future is in peril.

So now we know what has kept meager spending afloat during this pitiful “recovery.” A combination of “alternative loans” and a bleeding of retirement accounts. The transformation of the public into a horde of broke debt serfs is almost complete.

TAX ESSENTIALS

My Comments: I think I found this article published in Medical Economics some months ago. I apologize for my inability to provide accurate sourcing. That aside, all of us have a ZERO obligation to pay more in taxes than absolutely necessary.

Just remember, the IRS has a responsibility to collect taxes. It’s up to us to figure out legitimate ways to NOT pay taxes. That puts the burden of compliance on us as taxpayers, so don’t expect the IRS to wave flags here and there that say “no taxes are necessary if you do this”. It’s not going to happen. Here’s the text I found:

Since 2001, the tax code has undergone 4,680 changes—an average of more than one change per day. Even worse, physicians are paying more in taxes. Because of these trends, intelligent tax preparation has become essential, not optional.

To help, some changes in U.S. tax laws are highlighted in this article. This is by no means a complete list, but identifying strategies for dealing with these areas represents a big step to creating to a solid tax strategy.

On New Year’s Day 2013, the Bush-era tax cuts expired. Now the rich pay more (or are supposed to.) The top tax rate for individuals earning $400,000 or more, and married couples filing jointly earning $450,000 and up, is 39.6%. This is the highest rate in nearly 15 years.

Capital gains rates also increased under the same “fiscal cliff” deal. The wages of individuals earning more than $200,000 ($250,000 for married couples), now are subject to Medicare surtax. This will be tacked on to wages, compensation, or self-employment income over that amount. The surcharge is .9%.

There is not much to be done about these increases, which were a long time coming and received bipartisan support. While taxes can’t be eliminated altogether, they can be significantly reduced with proper preparation. Such preparation may include structured trusts, limited partnerships and other legal entities.

Another tax is the net investment income tax, under which individuals earning $200,000 ($250,000 for couples) may now owe more. Taxpayers with net investment income and modified adjusted gross income (AGI) will likely pay more. Net investment income encompasses: income from a business, dividends, capital gains, rental and royalty income, and/or interest.

Depending on any business or investment activities outside your practice, there may be circumstances where you owe more. Be sure to check with a professional to assure all income outside of your medical practice is accounted for appropriately. Please note that wages, unemployment compensation, operating income from a non-passive business, Social Security, alimony, tax-exempt interest, self-employment income, and distributions from certain Qualified Plans are excluded—for now.

In addition, personal exemptions (PEPs) for high earners may be eliminated. The phase-out of the personal exemption affects individuals with adjusted gross incomes of more than $254,200 and $305,050 for married taxpayers. They end completely for individuals who earn $376,700 or more and $427,550 for married taxpayers. While PEPs are generally a drop in the bucket for high earners—it was only $3,950 in 2014—it’s a lost deduction that can add up over several years.

Interestingly, while the definition of marriage is decided by individual states, the Internal Revenue Service recognizes a legally married same-sex couple in all 50 states, no matter what their legal status is in their home state. This can affect tax, estate, legal, and charitable planning.

Savvy estate planning for all married couples and individuals may involve various types of trusts, such as a charitable-lead trust. When created and structured properly, the charitable-lead trust earns an immediate tax deduction, avoids taxes on appreciated assets, and may provide an inheritance for heirs later.

A charitable-remainder trust potentially avoids capital gains taxes on appreciated assets, allows you to receive income for life, and provides a tax deduction now for your future (posthumous) charitable contribution. For large, significant charitable gifts, donating appreciated stocks or mutual fund shares (provided you’ve owned them for over 366 days) is a way to boost your largesse.

Under IRS rules, the charitable contribution deduction is the fair market value of the securities on the date of the gift—not the amount you paid for the asset. And there is no tax on the profit. This only works for assets that have appreciated in value, not for those on which you have a loss.

Now for the good news: You may be able to benefit from Tax-Free Education Reimbursements for continuing medical education (CME) via a Section 127 educational assistance plan, depending on the way your practice (or your employer’s practice) is structured.

If you are an employee and your employer does not pay for the CME, it is considered a miscellaneous itemized deduction subject to the 2% AGI limitation. Under this scenario it is better to negotiate to have your employer pick up the costs. Then it is a deduction for the employer and nontaxable to the employee.

If your practice is a sole proprietorship or a single-member LLC, than the cost should be deducted on your Schedule C, and is a deduction from AGI (and self-employment tax). If the practice is a multi-member LLC, partnership, or S corporation, it is best for the entity to pay the expense. Doing so reduces the flow through income from the entity and effectively reduces AGI.

Under the partnership scenario (or an LLC taxed as a partnership), if the operating agreement states that the expense must be paid by the partner/member and that the entity will not reimburse the costs, then the expense can be deducted on Schedule E of your tax return (thus reducing your AGI). This treatment is not available to an S corporation.

The conversion privilege for Roth individual retirement accounts (IRAs) continues. Converting a traditional IRA into a Roth account is treated as a taxable distribution from the traditional account with the money going into the new Roth account. The result of this conversion is a larger federal income tax hit (a larger state tax hit is also likely).

But the benefits may outweigh the extra money owed. At age 59½, all income and gains accrued in the Roth account can be withdrawn free from federal income taxes, provided at least one Roth IRA has been open for more than five years.

In the event that future federal income tax rates rise, the Roth IRA’s balance isn’t affected. Provided the account is over five years old, if you die, your heirs can use the money in your Roth account without owing any federal income tax. And unlike traditional IRAs, Roth IRAs are exempt from required minimum distribution (RMD) rules applied to other retirement accounts, including traditional IRAs.

Under the RMD rules, you must start taking annual withdrawals after age 70½ and pay the resulting taxes. But you can leave Roth IRA balances untouched for as long as you wish and continue earning federal-income-tax-free income and capital gains. And there is no income restriction on Roth conversions: Everyone, no matter their income, can do them.

Selling a home may be excluded from tax. How? Suppose an individual sells a primary residence. She or he may exclude up to $250,000 of gain. A married couple may exclude up to $500,000.

There are a few caveats, however. Principal ownership of the property, for at least two years during the five-year period ending at the sale date, is required. Also, the property must have been a primary residence for two years or more during the same five years. The maximum $500,000 joint-filer exclusion requires at least one spouse to pass the ownership test; both need to pass the use test.

Regarding previous sales, if gains from an earlier principal residence sale were excluded, there is typically a wait of at least two years before taking advantage of the gain exclusion provision again. Married joint filers may only take advantage of the larger $500,000 exclusion if neither spouse claimed the exclusion privilege on an earlier sale within two years of the ¬latter.

There is also positive news regarding the dependent care credit. If you employ child care for one or more children under the age of 13 so that you can work (or, if you’re married, you and your spouse can work), you may be eligible for this credit. Affluent families receive a credit equaling 20% of qualifying expenses of up to $3,000 for one child, or, up to $6,000 of expenses for two or more. The maximum credit for one child is $600; for two or more it’s $1,200.

The credit is also available to those who incur expenses taking care of a person of any age who is physically or mentally unable to care for themselves (i.e., a disabled spouse, parent, or child over the age of 13).

5 Key QLAC Rules to Help You Defer Taxable Income

financial freedomMy Comments: Yesterday, President’s Day, was all about memories and things past. Today, we’re back with a somewhat esoteric idea to help you grow and keep your money.

Much of the talk in Washington these days is about income inequality and how much the 1% make each year. For some of us in the 99%, there is little dispute that legitimate ways can be found that defer taxes. This is one of them.

The IRS recently approved a way for us to defer ordinary income taxes on some of the money we may now have in what are known as “qualified plans”. That’s IRS speak for money that has NOT BEEN TAXED YET. Think IRA, or 401k, or 403b, and so on.

They, the IRS, introduced QLACs, which is an acronym for Qualifed Longevity Annuity Contracts. Here is a definitive explanation. (BTW, I have no idea what the initials after the authors name implies!)

Denise Appleby, APA, CISP, CRC, CRPS, CRSP

A longer life expectancy is one of the many benefits of modern medicine and healthy living. But with that longer life comes the risk that retirees may outlive their savings – a primary concern for many Americans.

To address those fears, many financial advisors are recommending annuity products, and the IRS has joined in by issuing final regulations on qualified longevity annuities that individuals can purchase in eligible retirement accounts. These regulations, issued on July 21, 2014, apply to contracts purchased on or after July 2, 2014.

Background
With the exception of Roth IRAs, retirement account owners must begin to take required minimum distributions (RMDs) for the year in which they reach age 70½. Qualified plans, 403(b)s and governmental 457(b) accounts can allow eligible participants to defer starting RMDs past age 70½ until retirement.

An RMD amount for a year is calculated by dividing the previous year-end fair market value (FMV) of the retirement account(s) by the account owner’s applicable life expectancy for the RMD year.

If an individual owns multiple traditional, SEP, and SIMPLE IRAs, the RMDs for each of those IRAs must be calculated separately, but can be totaled and taken from one or more of the IRAs. This aggregation treatment can also be applied if an individual owns multiple 403(b) accounts.

RMDs cannot be aggregated for qualified plans, such as 401(k) and pension plans.
Some individuals who already have sufficient income from other sources may prefer to avoid or defer the usually taxable income from RMDs for as long as possible. The qualifying longevity annuity contract (QLAC) rules provide what some consider a partial solution for these individuals.

The following is an explanation of some of the key QLAC provisions.

1. Eligible accounts
These QLAC rules apply to traditional IRAs, defined contribution plans, 403(b) plans, and eligible governmental 457(b) plans. For this purpose, “traditional IRA” includes SEP IRAs and SIMPLE IRAs. These QLAC rules do not apply to Roth IRAs because the RMD rules do not apply to Roth IRA owners. They also do not apply to defined benefit plans, as defined benefit plans already provide for distributions in the form of annuities.

2. Delayed required beginning date provides opportunity for deferred RMD income
Generally, RMDs must begin by the required beginning date (RMD), which is April 1 of the year that follows the year in which the account owner reaches age 70½.

For employer-sponsored retirement plans, the required beginning date (RBD) can be deferred until April 1 of the year that follows the year in which the participant retires from working for the plan sponsor. For retirement account owners who would prefer to defer starting RMDs past the RBD, QLACs provide an opportunity to defer RMDs on a portion of their account balances.

Under the QLAC rules, the annuity starting date for a QLAC is the first day of the month following the month in which the retirement account owner reaches age 85. A QLAC could include provisions that allow an earlier start date, but it is not required to do so.

3. QLAC excluded from FMV in RMD calculation
The value of a QLAC is excluded from the FMV used to calculate RMDs for the years before the annuity start date. This allows for a smaller RMD amount for those years.

4. QLAC Limits
The amount of the premiums paid for a QLAC cannot exceed the lesser of $125,000 or 25% of the owner’s account balance on the date of payment.

The $125,000 limit rules
• All of the owner’s retirement accounts are aggregated for the purpose of the $125,000 limit.
• The $125,000 is reduced by any QLAC premiums paid on or before the date of the QLAC premium payment for any other IRA or employer-sponsored retirement plan.
• The $125,000 limit is indexed for inflation in $10,000 increments.

The 25% limit rules
• The limit is determined separately for each defined contribution plan.
• The limit is determined separately for each eligible governmental 457(b) plan.
• The limit is determined separately for each 403(b) plan. This is a deviation from the RMD rules, which provide that 403(b) accounts can be aggregated for RMD purposes (see background section above).
• IRA balances are aggregated and treated as one when determining if this limit applies. Consistent with the RMD aggregation rule for IRAs, a QLAC can be purchased in one IRA even if another IRA balance is used to satisfy the 25% limit.
• The 25% is reduced by any QLAC premium payment for the same QLAC or another QLAC that is held or purchased for the owner’s IRAs.
• Aggregation by account type is not allowed. For instance, IRAs cannot be aggregated with qualified plans or 401(k) plans.
• IRA balances are determined as of Dec. 31 of the year that precedes the year in which the premium is paid.
• For employer-sponsored retirement plans, the balance is the account balance as of the last valuation date preceding the date of the premium payment. This is adjusted by adding contributions allocated to the account during the period that begins after the valuation date and ends before the date the premium is paid and reduced by any distributions made from the account during that period.

An important distinction for the FMV is that while the QLAC is excluded for the purposes of calculating RMDs, it is included for purposes of applying the 25% limit.

Let’s look at some examples:
Example 1
Sally has a 401(k) account with a balance of $500,000, an IRA with a balance of $40,000, and a 403(b) with a balance of $25,000. If she pays a QLAC premium of $125,000 from the 401(k) account, no additional QLAC premiums can be paid from any of the other accounts. This is because her QLAC premiums cannot exceed $125,000.

Example 2
Assume that the facts are the same as in Example 1, except that Sally pays a QLAC premium of $25,000 from the 401(k) account. She can pay additional QLAC premiums from the other accounts as long as the aggregate payment does not exceed $125,000 and the premium from one account does not exceed 25% of the account balance.

Example 3
Jim has a traditional IRA with a balance of $50,000, a 403(b) account with a balance of $100,000, and a 401(k) with a balance of $200,000. Jim’s QLAC premium cannot exceed the lesser of $125,000 or 25% of his account balance.

Jim’s total account balance is $350,000 and 25% of that is $87,500. Because of the restriction on aggregation of the 25% rule, Jim’s QLAC premium cannot exceed:
• $12,500 for the IRA
• $25,000 for the 403(b) and
• $50,000 for the 401(k) account.
If all three of the accounts were IRAs, then the QLAC could have been purchased in any of the IRAs.

5. Roth LACs are not QLACs
Annuities, including qualifying longevity annuity contracts, are not QLACs if they are purchased in a Roth IRA, even if they otherwise meet all of the requirements for a QLAC. If a QLAC is converted to a Roth IRA, it loses its QLAC status as of the date on which the conversion occurs.

Amounts held in Roth IRAs, including any QLAC that is converted to a Roth IRA and, as a result, loses its QLAC status, are not taken into consideration when determining the $125,000 and 25% QLAC limits.

Responsibility for monitoring limits
In general, the account owner is responsible for ensuring that the QLAC limits are not exceeded. Unless the IRA custodian or plan administrator has knowledge to the contrary, they are allowed to rely on the account owner’s representation that the limits are not being exceeded. For qualified plans, the reliance on the account owner’s representation does not extend to amounts held under a plan that is not maintained by the employer.

If the premium amounts are exceeded, the annuity contract could fail to be a QLAC unless the excess premium is returned to the non-QLAC portion of the account on a timely basis.

Other factors to consider
The guaranteed lifetime income-deferred RMD on QLACs and reduced RMDs as a result of excluding QLAC premiums are only some of the factors that should be considered when determining suitability. Another issue to take into account is the benefits payable to beneficiaries, including any optional features available when choosing a QLAC product. The availability of optional features could vary among different providers and products.

13 Reasons Why a QLAC Belongs in Your IRA

My Comments: Some people made good decisions along the way and now have significantly large IRA accounts. Some people I know have little need for the money to maintain their existing standard of living.

If this is you and would like to find a way to NOT take money every year and pay the IRS a sizeable chunk of your retirement nest egg, there is now a way to defer some of the taxes. You can’t avoid the truism about the inevitability of death and taxes, but you can delay it.

This article explains your new option. If you’d like to know more, send me an email or give me a call. I can help make it happen for you.

By Stan Haithcock / Nov 18, 2014

Qualified longevity annuity contracts (QLACs) were approved on July 1 of this year for use in Traditional IRAs, 401(k)s, and other approved retirement plans.

They’re also referred to as qualifying longevity annuity contracts. Regardless of what name you choose, let’s look at some reasons why you should consider including a QLAC in your IRA:

1. Potentially reduce taxes
The ruling allows you to use 25% of your individual retirement account, IRA, or $125,000, whichever is less, to fund a QLAC. That dollar amount is excluded from your required minimum distribution, RMD, calculations, which could potentially lower your taxes.

2. Lessen your RMDs
As an example, if you have a $500,000 Traditional IRA, you could fund a $125,000 QLAC under the current rules. Your RMDs (Required Minimum Distributions) would then be calculated on $375,000.

3. Plan for future income
QLACs allow you to defer as long as 15 years or to age 85, and guarantees a lifetime income stream regardless of how long you live.

4. Spousal and non-spousal benefits
Legacy benefits for both spouse and non-spouse beneficiaries guarantee that all the money will go to your family, not the annuity carrier.

5. Protect your principal
QLACs are longevity annuity structures, which are fixed annuities. Also referred to as deferred-income annuities (DIAs), the QLAC structure has no market attachments, and fully protects the principal.

6. Add a COLA
Depending on the carrier, you can attach a contractual COLA (cost-of-living adjustment) increase to the annual income or a CPI-U, Consumer Price Index for All Urban Consumers, type increase as well.

7. No annual fees
QLACs are fixed annuities, and have no annual fees. Commission to the agent are built into the product, and very low when compared with fully-loaded variable or indexed annuities.

8. Contractual guarantees only
QLACs are pure transfer of risk contractual guarantees, and agents cannot “juice” proposal numbers.

9. Laddering income
Because of the QLAC premium limitations, this strategy should be used as part of your overall income laddering strategies, and in combination with longevity annuities in non-IRA accounts.

10. No indexed or variables allowed
Variable and indexed annuities cannot be used as a QLAC, which is a positive for the consumer in my opinion. Only the longevity annuity structure is approved under the QLAC ruling.

11. Complements Social Security
QLACs work similarly to your Social Security payments by guaranteeing a lifetime income stream starting at a future date.

12. Indexed to inflation
The QLAC ruling allows the premium amount to be indexed to inflation. That specific amount is $10,000, and should increase by the amount every three to four years.

13. Only the big carriers play
Because of the reserve requirements to back up the contractual guarantees, only the large carrier names most people are familiar with will offer the QLAC version of the longevity annuity structure.

I have recently written an easy to read QLAC Owner’s Manual that clearly explains the law and what you need to know to make an informed decision. In my opinion, it’s worth your time to take a closer look.