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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘IRA’

Tax Time Guide: Still Time to Contribute to an IRA for 2014

Posted by William Byrnes on March 18, 2015


IRS logo“Taxpayers still have time to contribute to an IRA for 2014 and, in many cases, qualify for a deduction or even a tax credit”, stated the IRS in this week’s newswire (50-IR-2015). (see 7 Tax Facts for Making IRA Contributions)

Available in one form or another since the mid-1970s, individual retirement arrangements (IRAs) are designed to enable employees and self-employed people to save for retirement. Contributions to traditional IRAs are often deductible, but distributions, usually after age 59½, are generally taxable. Though contributions to Roth IRAs are not deductible, qualified distributions, usually after age 59½, are tax-free. Those with traditional IRAs must begin receiving distributions by April 1 of the year following the year they turn 70½, but there is no similar requirement for Roth IRAs.

see 5 Tax Facts for Year End IRA

Most taxpayers with qualifying income are either eligible to set up a traditional or Roth IRA or add money to an existing account. To count for 2014, contributions must be made by April 15, 2015. In addition, low- and moderate-income taxpayers making these contributions may also qualify for the saver’s credit when they fill out their 2014 returns.

see Can an individual roll over or convert a traditional IRA or other eligible retirement plan into a Roth IRA?

Eligible taxpayers can contribute up to $5,500 to an IRA. For someone who was at least age 50 at the end of 2014, the limit is increased to $6,500. There’s no age limit for those contributing to a Roth IRA, but anyone who was at least age 70½ at the end of 2014 is barred from making contributions to a traditional IRA for 2014 and subsequent years.

The deduction for contributions to a traditional IRA is generally phased out for taxpayers covered by a workplace retirement plan whose incomes are above certain levels. For someone covered by a workplace plan during any part of 2014, the deduction is phased out if the taxpayer’s modified adjusted gross income (MAGI) for that year is between $60,000 and $70,000 for singles and heads of household and between $0 and $10,000 for married persons filing separately. For married couples filing a joint return where the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range for the deduction is $96,000 to $116,000. Where the IRA contributor is not covered by a workplace retirement plan but is married to someone who is covered, the MAGI phase-out range is $181,000 to $191,000.

see When Are IRA Funds Taxed?

The deduction for contributions to a traditional IRA is claimed on Form 1040 Line 32 or Form 1040A Line 17. Any nondeductible contributions to a traditional IRA must be reported on Form 8606.

Even though contributions to Roth IRAs are not deductible, the maximum permitted amount of these contributions is phased out for taxpayers whose incomes are above certain levels. The MAGI phase-out range is $181,000 to $191,000 for married couples filing a joint return, $114,000 to $129,000 for singles and heads of household and $0 to $10,000 for married persons filing separately. For detailed information on contributing to either Roth or traditional IRAs, including worksheets for determining contribution and deduction amounts, see Publication 590-A, available on IRS.gov.

see Recharacterizing Roth IRAs Smartly: Use Multiple Roths

Also known as the retirement savings contributions credit, the saver’s credit is often available to IRA contributors whose adjusted gross income falls below certain levels. For 2014, the income limit is $30,000 for singles and married persons filing separate returns, $45,000 for heads of household and $60,000 for married couples filing jointly.

Eligible taxpayers get the credit even if they qualify for other retirement-related tax benefits. Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. The amount of the credit is based on a number of factors, including the amount contributed to either a Roth or traditional IRA and other qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

see High-income clients able to fund Roth IRAs?

Tax Facts on Individuals & Small Business

2014_tf_on_individuals_small_businesses-m_1Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor.  Financial advisors are continually looking for competitive information to help them provide the best answers for their clients and to obtain new clients.  National Underwriter’s Tax Facts series is the only resource written specifically for the financial advisor and producer providing fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts has been famous over 50 years.

Anyone interested can try Tax Facts Online risk-free for 30 days, with a 100% guarantee of complete satisfaction.  Call 1-800-543-0874.

Posted in Retirement Planning | Tagged: , | 1 Comment »

5 Tax Facts for Year End IRA

Posted by William Byrnes on December 11, 2014


Individual Retirement Accounts are an important way to save for retirement. A taxpayer who has an IRA or who may open one soon need to be aware of four key year-end Tax Facts.

1. What is the IRA Annual Contribution Limit for 2014?  A taxpayer can contribute up to a maximum of $5,500 ($6,500 if 50 or older) to a traditional or Roth IRA. If a taxpayer files a joint return with a spouse, each taxpayer may contribute to an IRA even if only one has taxable compensation.  In some cases, the taxpayer may need to reduce the income tax deduction allowed for the traditional IRA contributions.  This income tax deduction reduction applies if one of the spouses has a retirement plan already at work and their combined income is above a certain level.

2. What is the Last Day to Contribute to 2014 IRA Limit? A taxpayer can actually contribute in 2015 toward the 2014 IRA contribution maximum amount allowed, but the last day for such catch up contribution is April 15, 2015 (the date the tax return for 2014 is due).

3. What is the Penalty for Contributing More Than the Limit?  A taxpayer is subject to a six percent tax on the excess contribution above the IRA contribution limit for the year.  Worse though, the tax applies each year that the excess amount remains in the IRA account.  To avoid this penalty, a taxpayer must withdraw the excess amount from the IRA by April 15, 2014, or by the date of any 2014 filing extension.

4. When Must a Taxpayer Begin Taking the IRA Required Minimum Distributions (RMD)?  When a taxpayer reaches age 70½, then a required minimum distribution, or RMD, is required from a traditional IRA.  However, a Roth IRA does not have a RMD.  The RMD is required by Dec. 31, 2014.  But the deadline is April 1, 2015 if the taxpayer reached 70½ in 2014.

When a taxpayer has more than one traditional IRA, then the RMD calculation is required to be made separately for each IRA. But, the total RMD can be withdrawn from just one, or more of them.  The penalty for not taking the full annual RMD amount is a 50 percent excise tax on the RMD amount not withdrawn.

5. What is the Saver’s credit?  The formal name of the saver’s credit is the retirement savings contributions credit. A taxpayer may potentially qualify for this credit if contributing to an IRA or retirement plan. The saver’s credit can increase the tax refund or reduce the tax owed for 2014.

2015_tf_on_indiv_sm_business_cover-mTax Facts on Individuals & Small Business focuses exclusively on what individuals and small businesses need to know to maximize opportunities under today’s often complex tax rules.  It is the essential tax reference for financial advisors, & planners; insurance professionals; CPAs; attorneys; and other practitioners advising small businesses and individuals.

Organized in a convenient Q&A format to speed you to the information you need, Tax Facts on Individuals & Small Business delivers the latest guidance on:
• Healthcare & New Medicare Tax and Net Investment Income tax
• Business Deductions and Losses including Home Office
• Contractor vs. Employee — clarified!
• Business Life Insurance
• Small Business Entity Choices & Small Business Valuation
• Capital Gains & Investor Losses
• Accounting — including guidance on how standards change as the business grows

Posted in Retirement Planning | Tagged: , | Leave a Comment »

Will the IRS Help Pay for Your Retirement ?

Posted by William Byrnes on November 17, 2014


IRS logoIf you are a low-to-moderate income worker, you can take steps now to save two ways for the same amount. With the saver’s credit you can save for your retirement and save on your taxes with a special tax credit. Here are six tips you should know about this credit:

1. Save for retirement.  The formal name of the saver’s credit is the retirement savings contributions credit. You may be able to claim this tax credit in addition to any other tax savings that also apply. The saver’s credit helps offset part of the first $2,000 you voluntarily save for your retirement. This includes amounts you contribute to IRAs, 401(k) plans and similar workplace plans.

2. Save on taxes.  The saver’s credit can increase your refund or reduce the tax you owe. The maximum credit is $1,000, or $2,000 for married couples. The credit you receive is often much less, due in part because of the deductions and other credits you may claim.

3. Income limits.  Income limits vary based on your filing status. You may be able to claim the saver’s credit if you’re a:

• Married couple filing jointly with income up to $60,000 in 2014 or $61,000 in 2015.

• Head of Household with income up to $45,000 in 2014 or $45,750 in 2015.

• Married person filing separately or single with income up to $30,000 in 2014 or $30,500 in 2015.

4. When to contribute.  If you’re eligible you still have time to contribute and get the saver’s credit on your 2014 tax return. You have until April 15, 2015, to set up a new IRA or add money to an existing IRA for 2014. You must make an elective deferral (contribution) by the end of the year to a 401(k) plan or similar workplace program.

If you can’t set aside money for this year you may want to schedule your 2015 contributions soon so your employer can begin withholding them in January.

5. Special rules apply.  Other special rules that apply to the credit include:

• You must be at least 18 years of age.

• You can’t have been a full-time student in 2014.

• Another person can’t claim you as a dependent on their tax return.

IRS Resources

Posted in Retirement Planning, Taxation | Tagged: , , | Leave a Comment »

High-income clients able to fund Roth IRAs?

Posted by William Byrnes on May 27, 2014


Roth IRAs usually do not make it into a higher-income client’s retirement planning playbook. The income limits set in place even prevent many upper-middle class clients from contributing to a Roth.

These limits do, in fact, block clients with earnings above the annual threshold level from contributing to a Roth directly, but there is an alternative route to Roths for high-income clients looking to minimize their tax burden in retirement.

Read >Roths for high earners: the strategy < !

2013_tf_insurance_emp_benefits_combo_covers-m_2Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

Organized in a convenient Q&A format to speed you to the information you need, 2014 Tax Facts on Insurance & Employee Benefits delivers the latest guidance on:

  • Estate & Gift Tax Planning
  • Roth IRAs
  • HSAs
  • Capital Gains, Qualifying Dividends
  • Non-qualified Deferred Compensation Under IRC Section 409A
  • And much more!

Key updates for 2014:

  • Important federal income and estate tax developments impacting insurance and employee benefits including changes from the American Taxpayer Relief Act of 2012
  • Concise updated explanation and highlights of the Patient Protection and Affordable Care Act (PPACA)
  • Expanded coverage of Annuities
  • New section on Structured Settlements
  • New section on International Tax
  • More than thirty new Planning Points, written by practitioners for practitioners, in the following areas:
    • Life Insurance
    • Health Insurance
    • Estate and Gift Tax
    • Deferred Compensation
    • Individual Retirement Plans

Plus, you’re kept up-to-date with online supplements for critical developments.  Written and reviewed by practicing professionals who are subject matter experts in their respective topics, Tax Facts is the practical resource you can rely on.

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7 Tax Facts for Making IRA Contributions

Posted by William Byrnes on May 14, 2014


In Tax Tip 2014-50, the IRS discussed 7 important tax facts about planning for contributions to an IRA.

1. A taxpayer must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.

2. A taxpayer must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income.  It also includes tips, commissions, bonuses and alimony. If a taxpayer is married and files a joint return, generally only one spouse needs to have compensation.

3. A taxpayer can contribute to an IRA at any time during the year for that year and even may count contributions, up to a certain date, made the following year.  That certain date for 2013 contributions to count, even if made in 2014, is that the contributions made in 2014 had to be by the due date of the 2013 tax return (which was April 15).

Thus, contributions may count for the year 2014 that are made in 2014 and that are made in 2015 up until the date that the 2014 tax return must be filed (Wednesday, April 15, 2015.)

The date to include IRA contributions may not be pushed back with extensions.   Also, no double counting!   If a taxpayer contributes to an IRA between Jan. 1 and April 15, then the IRA plan sponsor must apply it to the correct year which is either the current one, or the previous one, depending upon what the taxpayer has planned.  In general, taxpayers will use this option to contribute toward last year’s contribution limit when at the end of the year, they discover that they have not contributed the full amount allowed by the IRA tax rules.  Said another way, the taxpayer has excess contribution limit remaining for the previous year, and this option allows the taxpayer to fill it.

4. In general, the most a taxpayer can contribute to an IRA for 2014 is the smaller of either your taxable compensation for the year or $5,500. If a taxpayer were age 50 or older at the end of 2014, the maximum you can contribute increases to $6,500.

5. A taxpayer normally will not pay income tax on funds in a traditional IRA until the taxpayer starts taking distributions from it. Qualified distributions from a Roth IRA are tax-free.

6. A taxpayer may be able to deduct some or all of the contributions to a traditional IRA.  A taxpayer should use the worksheets in the Form 1040A or Form 1040 instructions to figure the amount of the contribution that can be deducted for a traditional IRA.  Unlike a traditional IRA, a taxpayer cannot deduct contributions to a Roth IRA.

7. A taxpayer can contribute to an IRA and also may also qualify for the Saver’s Credit. The credit can reduce taxes up to $2,000 if filing a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit.

2013_tf_insurance_emp_benefits_combo_covers-m_2Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

Organized in a convenient Q&A format to speed you to the information you need, 2014 Tax Facts on Insurance & Employee Benefits delivers the latest guidance on:

  • Estate & Gift Tax Planning
  • Roth IRAs
  • HSAs
  • Capital Gains, Qualifying Dividends
  • Non-qualified Deferred Compensation Under IRC Section 409A
  • And much more!

Key updates for 2014:

  • Important federal income and estate tax developments impacting insurance and employee benefits including changes from the American Taxpayer Relief Act of 2012
  • Concise updated explanation and highlights of the Patient Protection and Affordable Care Act (PPACA)
  • Expanded coverage of Annuities
  • New section on Structured Settlements
  • New section on International Tax
  • More than thirty new Planning Points, written by practitioners for practitioners, in the following areas:
    • Life Insurance
    • Health Insurance
    • Estate and Gift Tax
    • Deferred Compensation
    • Individual Retirement Plans

For an indepth analysis of deductions for donations to U.S. charities (and the government’s policy encouraging or discouraging these donations), download my article at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304044

If you are interested in discussing the Master or Doctoral degree in the areas of financial services or international taxation, please contact me profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour” 

Posted in Retirement Planning | Tagged: | Leave a Comment »

More than 40% of big firm partners retiring over coming decade – and many will outlive retirement savings!

Posted by William Byrnes on May 5, 2014


On April 28, 2014 The American Lawyer published its annual (2014) Big Law report in which it found that 16% of partners in the US’ largest 200 law firms by revenue are 60 years old or older with at least 8% least 65.  This generally means that these partners will be retiring over the next five years.  Moreover, right behind this retiring group are 28% more of the partners that have reached at least 50 years of age.

While these thousands of retiring partners have in general been earning between $1 million and $3 million annually, most also have lifestyles that correspond to spending this level of income.  These retiring partners are now asking “Will my retirement portfolio maintain my spouse and my lifestyles if we live another 30 years?”  “Will we have enough to truly enjoy our retirement, or will we have to cut back our lifestyle to make due?”  Will plans for luxurious global travel and spas be thrown out the window?  Wealth managers and financial planners have turned attention to these retirees.

“The 10,000 baby boomer that reach retirement age each day in America are waking up to the probability that they will outspend their retirement plan designed before the financial crisis, forcing a drastic reduction in quality of life style for the ‘golden years’” shared William Byrnes, author of National Underwriter’s Tax Facts.

“The largest concern for most middle class Americans is that social security since Ronald Reagan’s presidency did not increase enough to beat actual inflation.  The average social security monthly payment in 2014 is only $1,294 for a single retiree, and $2,111 for a married couple.  And it is possible that Congress will further reduce inflation adjustments for the future.”

“Moreover, baby boomers are outliving their retirement plans by at least ten years, and thus selling off their remaining assets and relying on children”, continued Professor Byrnes. “It’s no wonder that reverse mortgages have become so popular.”

“It’s not just the middle class retirees trying to survive on $2,500 a month over at least the next 20 years as lifestyle becomes more expensive, upper middle class Americans and even the wealthy also have lifestyle challenges.  A couple who for the past twenty years is used to spending $200,000 a year after tax needs to have significant assets.”

“Let’s run an example using a National Underwriter Advanced Markets retirement calculator.  A 50 year old partner at a law firm that requires retirement by age 67 currently earns after tax $300,000.  The partner will begin saving $60,000 a year toward retirement, and already has $400,000 saved and earned in tax deferred retirement accounts.  The partner expects earnings to increase 1.5% on average per year.  The partner expects to live until 90 years old, and will cut the annual lifestyle by 30% to $210,00 a year upon retirement.  The partner expects a healthy annual rate of return on the investments until reaching 90 of 5%, and average annual inflation of only 2%.”

“The question is: Will the partner’s retirement dollars last  until age 90? Unfortunately, the partner has only 13 years of retirement based on this scenario, and that only if including $42,937 of average annual social security.  At age 80, the $2,439,817 of retirement savings simply runs out. So given these variables, the partner must either save significantly more for retirement, have assets that can be sold down during retirement (such as the family home), or live on only $150,000 a year.  While $150,000 a year sounds like a lot to middle class retirees, for law firm partners living in New York, Miami, DC, LA, San Fran who are used to an upper class lifestyle, living on half the income with double the free time is a shock. And remember, this includes social security paying out over $40,000 of that $150,000 a year.”

“Stretching the retirement savings available for these additional ten years of life expectancy in the example above requires correctly calibrating a retirement plan over the next 20 years which includes managing the complex retirement savings and retirement plans tax rules.”

Robert Bloink added, “Baby boomers retirement taxation questions include: How are earnings on an IRA taxed? What is the penalty for making excessive contributions to an IRA? How are amounts distributed from a traditional and from a ROTH IRA taxed?  How is the required minimum distribution (RMD) calculated?”

“By example of managing the retirement taxation rules, if the baby boomer engages in a prohibited transaction with his IRA, his or her individual retirement account may cease to qualify for the tax benefits.  Thus, then baby boomer needs to understand what is a prohibited transaction?  When can the baby boomer tax pull retirement funds as a loan from a retirement account or policy without it being prohibited?”

“For complex modern families with multiple marriages and various children, a retirement and estate planner should analyze the non-probate assets”, interjected Dr. George Mentz. “Such assets may include the client’s 401k, 403b, 459, annuities, property and joint tenancy, among others.  Regarding insurance policy designations, the client may need to reexamine the beneficiaries, contingent and secondary, and percentages among them, based on current circumstances.”

“Because client’s are outliving their life expectancy and thus outliving their retirement planning, and medical expenses certainly factor into retirement planning, long term care for family members must also be addressed,” said William Byrnes.  “Moreover, recent press has focused client’s attention on tragic incident and end of life issues, such as a durable power of attorney for health care (DPA/HC), living will, or advance directives that explain the patient’s wishes in certain medical situations.  Finally in this regard, a client may require a Limited Powers of Attorney to address situations of incapacity, as well as orderly continuation of immediate family needs upon death.“

Robert Bloink included, “Other important issues to address with the client include pre-marital property contracts/pre-nuptials involving the second marriage(s), IRA beneficiary planning in blended families, spousal lifetime access trust (SLATs), and planning for unmarried domestic partners.”

tax-facts-online_medium

“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.” said Rick Kravitz.  “The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community.”

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

 Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

2014 Tax Facts on Investments provides clear, concise answers to often complex tax questions concerning investments.  2014 expanded sections on Limitations on Loss Deductions, Charitable Gifts, Reverse Mortgages, and REITs.

 

 

If you are interested in discussing the Master or Doctorate degree in the areas of financial services or taxation, please contact me https://profwilliambyrnes.com/online-tax-degree/

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5 Tax Facts for Early Retirement Plan Withdrawals

Posted by William Byrnes on April 28, 2014


In Tax Tip 2014-35, the IRS addressed the issue of potential tax penalties for withdrawing money before retirement age from a retirement account.

5 tax tips about early withdrawals from retirement plans:

1. An early withdrawal normally means taking money from a retirement plan before age 59½.

2. If a taxpayer makes a withdrawal from a plan, that withdrawal amount must be reported to the IRS on the annual tax return.  Income tax may be due as well as an additional 10 percent tax on the amount of the early withdrawal.  The taxpayer may need to file Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts”, with the annual federal tax return.

3. The additional 10 percent tax does not apply to nontaxable withdrawals.  Nontaxable withdrawals include withdrawals of the cost to participate in the retirement plan.  The cost includes the taxpayer’s after-tax contributions before the contributions are contributed to the plan.

4. A “rollover” is a type of nontaxable withdrawal. Generally, a rollover is a distribution to the taxpayer of cash or other assets from one retirement plan that is then immediately contributed to another retirement plan.  The taxpayer has 60 days to complete the rollover to make it tax-free.

5. There are many exceptions to the additional 10 percent tax. Some of the exceptions for retirement plans are different from the rules for IRAs.

Exceptions to Tax on Early Distributions

Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax and report the amount to the IRS for any early distributions, unless an exception applies.

The distribution will NOT be subject to the 10% additional early distribution tax in the following circumstances: Exception to 10% Additional Tax
Qualified Plans
(401(k), etc.)		 IRA, SEP, SIMPLE IRA* and SARSEP Plans Internal Revenue Code Section(s)
Age
after participant/IRA owner reaches age 59½ yes yes 72(t)(2)(A)(i)
Automatic Enrollment
permissive withdrawals from a plan with auto enrollment features yes yes for SIMPLE IRAs and SARSEPs 414(w)(1)(B)
Corrective Distributions
corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timely yes n/a 401(k)(8)(D),
401(m)(7)(A),
402(g)(2)(C)
Death
after death of the participant/IRA owner yes yes 72(t)(2)(A)(ii)
Disability
total and permanent disability of the participant/IRA owner yes yes 72(t)(2)(A)(iii)
Domestic Relations
to an alternate payee under a Qualified Domestic Relations Order yes n/a 72(t)(2)(C)
Education
qualified higher education expenses no yes 72(t)(2)(E)
Equal Payments
series of substantially equal payments yes yes 72(t)(2)(A)(iv)
ESOP
dividend pass through from an ESOP yes n/a 72(t)(2)(A)(vi)
Homebuyers
qualified first-time homebuyers, up to $10,000 no yes 72(t)(2)(F)
Levy
because of an IRS levy of the plan yes yes 72(t)(2)(A)(vii)
Medical
amount of unreimbursed medical expenses (>7.5% AGI; after 2012, 10% if under age 65) yes yes 72(t)(2)(B)
health insurance premiums paid while unemployed no yes 72(t)(2)(D)
Military
certain distributions to qualified military reservists called to active duty yes yes 72(t)(2)(G)
Returned IRA Contributions
if withdrawn by extended due date of return n/a yes 408(d)(4)
earnings on these returned contributions n/a no 408(d)(4)
Rollovers
in-plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 days yes yes 402(c), 402A(d)(3), 403(a)(4), 403(b)(8), 408(d)(3), 408A(d)(3)
Separation from Service
the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees in a governmental defined benefit plan) yes no 72(t)(2)(A)(v),
72(t)(10)

NOTE: Governmental 457(b) distributions are not subject to the 10% additional tax except for distributions attributable to rollovers from another type of plan or IRA.

*25% instead of 10% if made within the first 2 years of participation

tax-facts-online_medium

Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.  Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

“Our brand-new Tax Facts title is exciting in many ways,” says Rick Kravitz, Vice President & Managing Director of Summit Professional Network’s Professional Publishing Division. “First of all, it fills a huge gap in the resources available to today’s advisors. Small business is a big market, and this book enables advisors to get up-and-running right away, with proven guidance that will help them serve their clients’ needs. Secondly, it addresses the biggest questions facing all taxpayers and provides absolutely reliable answers that help advisors solve today’s biggest problems with confidence.”

“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.  The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

 

Posted in Retirement Planning | Tagged: , , , | 1 Comment »

Why Are Many Baby Boomer Retirees Worried?

Posted by William Byrnes on April 21, 2014


“The 10,000 baby boomer that reach retirement age each day in America are waking up to the probability that they will outspend their retirement plan designed twenty or thirty years ago, forcing a drastic reduction in quality of life style for the ‘golden years’” revealed William Byrnes, author of National Underwriter’s Tax Facts.

“By example, social security increases since Ronald Reagan’s presidency, when many Baby Boomers crafted their family retirement plans, did not keep up with the actual inflation.  Also, baby boomers are outliving their retirement plans by ten or more years”, continued William Byrnes.  “Stretching the retirement savings available for an additional twenty years of life expectancy requires correctly managing the complex retirement taxation rules established by Congress and the IRS.”

Robert Bloink added, “Baby boomers retirement taxation questions include: How are earnings on an IRA taxed? What is the penalty for making excessive contributions to an IRA? How are amounts distributed from a traditional and from a ROTH IRA taxed?  How is the required minimum distribution (RMD) calculated?”

“By example of managing the retirement taxation rules, if the baby boomer engages in a prohibited transaction with his IRA, his or her individual retirement account may cease to qualify for the tax benefits.  Thus, then baby boomer needs to understand what is a prohibited transaction?  When can the baby boomer tax pull retirement funds as a loan from a retirement account or policy without it being prohibited?”

“For complex modern families with multiple marriages and various children, a retirement and estate planner should analyze the non-probate assets”, interjected Dr. George Mentz.  “Such assets may include the client’s 401k, 403b, 459, annuities, property and joint tenancy, among others.  Regarding insurance policy designations, the client may need to reexamine the beneficiaries, contingent and secondary, and percentages among them, based on current circumstances.”

“Because client’s are outliving their life expectancy and thus outliving their retirement planning, and medical expenses certainly factor into retirement planning, long term care for family members must also be addressed,” said William Byrnes.  “Moreover, recent press has focused client’s attention on tragic incident and end of life issues, such as a durable power of attorney for health care (DPA/HC), living will, or advance directives that explain the patient’s wishes in certain medical situations.  Finally in this regard, a client may require a Limited Powers of Attorney to address situations of incapacity, as well as orderly continuation of immediate family needs upon death.“

Robert Bloink included, “Other important issues to address with the client include pre-marital property contracts/pre-nuptials involving the second marriage(s), IRA beneficiary planning in blended families, spousal lifetime access trust (SLATs), and planning for unmarried domestic partners.”

tax-facts-online_medium

“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.” said Rick Kravitz.  “The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community.”

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

 Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

2014 Tax Facts on Investments provides clear, concise answers to often complex tax questions concerning investments.  2014 expanded sections on Limitations on Loss Deductions, Charitable Gifts, Reverse Mortgages, and REITs.

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9 retirement savings tax tips

Posted by William Byrnes on April 17, 2014


You might be able to muddle through retirement without knowing each and every line of Uncle Sam’s tax code. But you’ll likely give the federal government more than its fair share of your nest egg if you don’t know what William Byrnes, author of National Underwriter’s Tax Facts, calls the big retirement plan tax facts.

Read the USA Today analysis, written by renown financial journalist Robert Powell:  “Stretching the retirement savings available for an additional 20 years of life expectancy requires correctly managing the complex retirement taxation rules established by Congress and the IRS,” says Byrnes, who is also associate dean at the Thomas Jefferson School of Law in San Diego, Calif.

The full analysis is available on USA Today at 9 retirement savings tax tips!

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Tomorrow’s Deadline (April 1) for Many Retirees To Take Required Retirement Plan Distributions

Posted by William Byrnes on March 31, 2014


The Internal Revenue Service in Tax Tip 2014-38 reminded taxpayers who turned 70½ during 2013 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Tuesday, April 1, 2014.

The April 1 deadline applies to owners of traditional IRAs but not Roth IRAs. Normally, it also applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457 plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70½ in 2013 and receives the first required payment on April 1, 2014 must still receive the second RMD by Dec. 31, 2014.

Affected taxpayers who turned 70½ during 2013 must figure the RMD for the first year using their life expectancy on Dec. 31, 2013 and their account balance on Dec. 31, 2012. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the Appendices to Publication 590.

Most taxpayers use Table III (Uniform Lifetime) to figure their RMD. For a taxpayer who turned 71 in 2013, for example, the first required distribution would be based on a life expectancy of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2014. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2014 RMD, this amount would be on the 2013 Form 5498 that is normally issued in January 2014.

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Warning on IRA Rollovers: Regulators to Scrutinize Suitability

Posted by William Byrnes on March 22, 2014


Threats of heightened regulatory scrutiny have loomed large in the first weeks of 2014, and perhaps no area has received greater attention than the IRA rollover transaction.

Both the SEC and FINRA have issued warnings to advisors who provide guidance to clients looking to roll traditional workplace 401(k) accounts into private IRAs, and this focus on the importance of proper guidance should be keeping all advisors on their toes. For many advisors, this means a new course in IRA rollover compliance is called for, as even the most experienced professionals may find themselves in the dark over the new requirements being ushered in by the industry’s most prominent regulators.

Read the analysis of William Byrnes and Robert Bloink at > ThinkAdvisor <

ThinkAdvisor.com supports the professional growth and vitality of the Investment Advisory community, from RIAs and wealth managers of all kinds, to independent broker-dealer and wirehouse representatives. We provide unparalleled access to the knowledge, information and critical resources they need to succeed at every stage in their career, including professional development, education and certification, industry news and analysis, reference tools and services, and community networking opportunities.

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The IRS Will Pay You to Save Retirement Money !

Posted by William Byrnes on March 18, 2014


2013_tf_insurance_emp_benefits_combo_covers-m_2The IRS reported in Tax Tip 2014-28 that it will pay some taxpayers to save for retirement!

If a taxpayer contributes to a retirement plan, like a 401(k) or an IRA, then the taxpayer may be eligible for the “Saver’s Credit”. The Saver’s Credit can help save for retirement and reduce this year’s tax owed.  5 facts about this credit:

1. The Saver’s Credit is the short name for the Retirement Savings Contribution Credit. It can be worth up to $2,000 for married couples filing a joint return. The credit is worth up to $1,000 for single taxpayers.

2. Eligibility depends on a taxpayer’s filing status and the amount of yearly income.  2013 tax return eligibility for the credit depends on:

  • Married filing separately or a single taxpayer with income up to $29,500
  • Head of household with income up to $44,250
  • Married filing jointly with income up to $59,000

3. Other special rules that apply to the credit include:

  • Must be at least 18 years of age.
  • Can’t be a full-time student in 2013.
  • Can’t be claimed as a dependent on another person’s tax return.

4. The taxpayer must have contributed to a 401(k) plan or similar workplace plan by the end of the year to claim this credit. However, a taxpayer can contribute to an IRA by the due date of a tax return (April 15, 2014) and still have that contribution count for 2013.

5. File Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. Tax software includes this form for e-file.

The Saver’s Credit is in addition to other tax savings for setting aside money for retirement.  For example, a taxpayer may be able to deduct contributions to a traditional IRA.

Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

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Can Your Business Help its Employees Save in 2014 Via an Automatic Payroll Deduction IRA?

Posted by William Byrnes on February 3, 2014


This artticle discusses one avenue for retirement planning solutions for small businesses. Financial Planners who have small business clients may consider a discussion on the automatic payroll deduction IRAs as one simple way to help employees save for retirement.

A payroll deduction individual retirement account (IRA) is one simple way for businesses to give employees an opportunity to save for retirement. The program is easy to implement; the employer sets up the payroll deduction IRA program with a bank, insurance company or other financial institution, and then the employees choose whether and how much they want deducted from their paychecks and deposited into the IRA. Depending on the IRA service provider, some employees may also have a choice of investments depending on the IRA provider. Wealth managers can add value to employees and employers by, not only establishing a plan, but by also working with employees to help them manage their IRAs.

Under a payroll deduction IRA, the employee makes all of the contributions, thus there are no employer contributions. By making regular payroll deductions, employees are able to contribute smaller amounts each pay period to their IRAs, rather than having to come up with a larger amount all at once.

One advantage of these accounts is that there is little administrative cost and no annual filings with the government. Moreover, businesses of any size can participate as there is no requirement that an employer have a certain number of employees to set up a payroll deduction IRA.

Another element that makes the program attractive to some small businesses is that the program will not be considered an employer retirement plan subject to Federal requirements for reporting and fiduciary responsibilities as long as the employer keeps its involvement to a minimum.

Here’s how the IRAs generally work: The employer sets up the payroll deduction IRA program with a financial institution, such as a bank, mutual fund or insurance company. The employee establishes either a traditional or a Roth IRA (based on the employee’s eligibility and personal choice) with the financial institution and authorizes the payroll deductions. The employer withholds the payroll deduction amounts that the employee has authorized and promptly transmits the funds to the financial institution. After doing so, the employee and the financial institution are responsible for the amounts contributed.

Generally however, the employer needs to remain neutral with respect to the IRA provider. It cannot negotiate with an IRA provider to obtain special terms for its employees, exercise any influence over the investments made or permitted by the IRA provider, or receive any compensation in connection with the IRA program except reimbursement for the actual cost of forwarding the payroll deductions.

Commonly, any employee who performs services for the business (or “employer”) can be eligible to participate. The decision to participate is left exclusively up to the employee. The employees should understand that they have the same opportunity to contribute to an IRA outside the payroll deduction program and that the employer is not providing any additional benefit to employees who participate.

Employees’ tax-deferred contributions are generally limited to a maximum annual calendar year contribution, for 2014 that maximum is $5,500.00. Additional “catch-up” contributions of currently $1,000.00 a year are permitted for employees age 50 or over, thus a total of $6,500.00 a year for 2014.

Example of time value of money

Saving $500.00 per month, for 20 years, at 6% annual return over that time will provide you $232,176.00 for retirement.  See the US government’s Tools and Calculators for Investors

The new Presidential myRA to be established by Treasury in 2014

The new myRA, to be established by Treasury under request of President Obama, is covered previously in this blog at > myRA <  Several blog subscribers have emailed me with policy and operational questions about the “myRA“.   A vein of questions that I find particularly interesting is whether tax policy rests with the executive instead of Congress?  The myRA has a tax benefit (tax exemption during the earnings period) and a cost (no fees to be passed onto the employee, but as the adage goes: “there is no free lunch”).  Tax Policy (tax imposition and tax benefit) should be established by Congress as part of the democratic process of establishing a fiscal budget.   Yet, this norm is not absolute because Congress handed over of both establishing and enforcing regulation to the Executive (Treasury in this case).  Establishing and enforcing the regulations also impacts policy.  If you care to comment directly in the blog, do so below or feel free to continue sending me your comments directly. 

2013_tf_insurance_emp_benefits_combo_covers-m_2Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

Organized in a convenient Q&A format to speed you to the information you need, 2014 Tax Facts on Insurance & Employee Benefits delivers the latest guidance on:

  • Estate & Gift Tax Planning
  • Roth IRAs
  • HSAs
  • Capital Gains, Qualifying Dividends
  • Non-qualified Deferred Compensation Under IRC Section 409A
  • And much more!

Key updates for 2014:

  • Important federal income and estate tax developments impacting insurance and employee benefits including changes from the American Taxpayer Relief Act of 2012
  • Concise updated explanation and highlights of the Patient Protection and Affordable Care Act (PPACA)
  • Expanded coverage of Annuities
  • New section on Structured Settlements
  • New section on International Tax
  • More than thirty new Planning Points, written by practitioners for practitioners, in the following areas:
    • Life Insurance
    • Health Insurance
    • Estate and Gift Tax
    • Deferred Compensation
    • Individual Retirement Plans

Plus, you’re kept up-to-date with online supplements for critical developments.  Written and reviewed by practicing professionals who are subject matter experts in their respective topics, Tax Facts is the practical resource you can rely on.

Posted in Retirement Planning, Wealth Management | Tagged: , , , , , | Leave a Comment »

Opportunity for All: Securing a Dignified Retirement for All Americans (the “myRA”)

Posted by William Byrnes on January 29, 2014


Since many persons have asked me for the link, I copy the new myRA information from the President’s announcement below.  Creating the “myRA” – a Simple, Safe, and Affordable Starter Savings Account to Help Millions of Americans Start Saving for Retirement….

In the State of the Union, the President announced that he will use his executive authority to direct the Department of the Treasury to create “myRA” – a new simple, safe and affordable “starter” retirement savings account that will be offered through employers and will ultimately help millions of Americans begin to save for retirement.

  • Starter Savings Account: Making It Easier to Start Saving for Retirement. This new product will be targeted to the many Americans who currently lack access to workplace retirement savings plans, which is usually the most effective way to save for retirement. Starting to save is just the first step towards a secure retirement, and the President wants to help more Americans save for their future.
  • Safe and Secure: Principal Protection So Savers’ Account Balance Will Never Go Down. The product will be offered via a familiar Roth IRA account, and savers will benefit from principal protection, so the account balance will never go down in value. The security in the account, like all savings bonds, will be backed by the U.S. government. Contributions can be withdrawn tax free at any time.
  • User-Friendly for Savers: Portable Account with Contributions that Are Voluntary, Automatic, and Small. Initial investments could be as low as $25 and contributions that are as low as $5 could be made through easy-to-use payroll deductions.  Savers have the option of keeping the same account when they change jobs and can roll the balance into a private-sector retirement account at any time.
  • Favorable Investment Return: Same Secure Investment Return Available to Federal Employees. Savers will earn interest at the same variable interest rate as the federal employees’ Thrift Savings Plan (TSP) Government Securities Investment Fund.
  • Widely Available: Available to Millions of Middle Class Americans Through Their Employer. This saving opportunity would be available to the millions of low- and middle-income households earning up to $191,000 a year.  These accounts will be offered through an initial pilot program to employees of employers who choose to participate by the end of 2014.  The accounts are little to no cost and easy for employers to use, since employers will neither administer the accounts nor contribute to them.   Participants could save up to $15,000, or for a maximum of 30 years, in their accounts before transferring their balance to a private sector Roth IRA.

…

The President remains committed to working with Congress to help secure a dignified retirement for all Americans. While Social Security is and must remain a rock-solid, guaranteed progressive benefit that every American can rely on, the most secure retirement requires a three-legged stool that includes savings and pensions. That’s why the President is using his executive authority to create the “myRA” and has already proposed to work with Congress on the following proposals to help Americans save for their retirement:

  • Giving Every Employee Access to Easy, Payroll-Based Savings Through the Auto-IRA. About half of all American workers do not have access to employer-sponsored retirement plans like 401(k)s, which puts the onus on individuals to set up and invest in an Individual Retirement Account (IRA). Up to 9 out of 10 workers automatically enrolled in a 401(k) plan through their employer make contributions, even years later, while fewer than 1 out of 10 workers eligible to contribute to an IRA voluntarily do so. The President’s budget will propose to establish automatic enrollment in IRAs (or “auto-IRAs”) for employees without access to a workplace savings plan, in keeping with a plan that he has proposed in every budget since he took office. Employers that do not provide any employer-sponsored savings plan would be required to connect their employees with a payroll deduction IRA.  This proposal could provide access to one-quarter of all workers, according to a recent study.

—–  Making Sure the Auto-IRA Works for Workers and Small Businesses. Workers would not be required to contribute and are free to opt out. Employers would also not contribute. The plan would also help defray the minimal administrative costs of establishing auto-IRAs for small businesses, including through tax incentives.

  • Removing Inefficient Retirement Tax Breaks for the Wealthiest While Improving Them for the Middle Class.  The Auto-IRA will spread the tax benefits for retirement savings to millions more middle-class Americans.  Current retirement tax subsidies disproportionately benefit higher-income households, many of whom would have saved with or without incentives. An estimated two-thirds of tax benefits for retirement saving go to the top 20% of earners, with one-third going to the top 5 percent of earners. Our tax incentives for retirement can be designed more efficiently.   According to one 2012 study, additional tax expenditures are a comparatively inefficient way to generate additional saving. The President has proposed to limit the benefits of tax breaks, including retirement tax preferences, for high income households to a maximum of 28 percent.  The President has also proposed to limit contributions to tax-preferred savings accounts once balances are about $3.2 million, large enough to fund a reasonable pension in retirement.

* Importance of Securing a Dignified Retirement for All Americans *

  • Many Americans lack access to workplace retirement savings plans – usually the most effective and generous means of saving for retirement.  About half of all workers and 75 percent of part-time workers lack access to employer-sponsored retirement plans.
  • The financial crisis dealt a severe blow to the retirement outlook for many families, wiping out more than $12 trillion dollars in household wealth. While financial markets have returned to their pre-crisis levels, median household wealth has only recovered 45 percent of the losses during the recession.
  • The risk of an insecure retirement is especially great for women, minorities, and low-income Americans. Women continue to be less prepared for retirement than men and comprise 63 percent of the elderly living below the poverty line. White households have six times the wealth, including retirement savings, of African Americans or Hispanics. And low-wage and part-time workers are just one-third as likely as high-wage and full-time workers to participate in an employer-based retirement plan.

 

2013_tf_insurance_emp_benefits_combo_covers-m_2Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

Organized in a convenient Q&A format to speed you to the information you need, 2014 Tax Facts on Insurance & Employee Benefits delivers the latest guidance on:

  • Estate & Gift Tax Planning
  • Roth IRAs
  • HSAs
  • Capital Gains, Qualifying Dividends
  • Non-qualified Deferred Compensation Under IRC Section 409A
  • And much more!

Key updates for 2014:

  • Important federal income and estate tax developments impacting insurance and employee benefits including changes from the American Taxpayer Relief Act of 2012
  • Concise updated explanation and highlights of the Patient Protection and Affordable Care Act (PPACA)
  • Expanded coverage of Annuities
  • New section on Structured Settlements
  • New section on International Tax
  • More than thirty new Planning Points, written by practitioners for practitioners, in the following areas:
    • Life Insurance
    • Health Insurance
    • Estate and Gift Tax
    • Deferred Compensation
    • Individual Retirement Plans

Plus, you’re kept up-to-date with online supplements for critical developments.  Written and reviewed by practicing professionals who are subject matter experts in their respective topics, Tax Facts is the practical resource you can rely on.

Posted in Retirement Planning | Tagged: , , , | 2 Comments »

IRS Offers Tips for Year-End Giving

Posted by William Byrnes on December 19, 2013


In its December 16th Newswire (IR-2013-98), the IRS reminded individuals and businesses making contributions to charity of several important tax law provisions that have taken effect in recent years. The IRS highlighted the following changes in the end of year Newswire.

Special Tax-Free Charitable Distributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2013, offers older owners of individual retirement arrangements (IRAs) a different way to give to charity.  An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, first available in 2006, can be used for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income – resulting in lower taxable income for the IRA owner. However, if the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Charitable Contributions of Clothing and Household Items

To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Donors must get a written acknowledgement from the charity for all gifts worth $250 or more that includes, among other things, a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2013 count for 2013. This is true even if the credit card bill isn’t paid until 2014. Also, checks count for 2013 as long as they are mailed in 2013.
  • Check that the organization is eligible. Only donations to eligible organizations are tax-deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
  • For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2013 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
  • For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  • The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
  • If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
  • And, as always it’s important to keep good records and receipts.

IRS YouTube Videos:

See Publication 526, Charitable Contributions.

See Online mini-course, Can I Deduct My Charitable Contributions?

 

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