2011 Required Minimum IRA Distributions

Now that the New Year is here, you can begin taking your required minimum distribution (RMD) for 2011. The following is an overview of the rules regarding these mandated distributions for older taxpayers.

The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required. Generally, required distributions begin in the year the IRA owner attains the age of 70½.

Beginning Date Requirement - IRA owners must take at least a minimum amount from their IRA each year, starting with the year they reach age 70½.

A taxpayer who fails to take a distribution in the year age 70½ is reached can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70½ is attained and one for the current year.

If an IRA owner dies after reaching age 70½, but before April 1st of the next year, a minimum distribution is not required because death occurred before the required beginning date.

Multiple IRA Accounts - For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual must be taken into consideration. The required minimum distribution must be determined separately for each account. However, the amounts can be totaled and distribution can be taken from just one of the accounts or it can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.

Determining the Distribution - The minimum amount that must be withdrawn in a particular year is the value of the IRA account divided by the number of years the IRA owner is expected to live.

 

• Determining Value: The value of each Traditional IRA is based on the IRA’s value at the end of the business day on December 31st of the PRIOR year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498.
• Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner’s life expectancy (referred to as “distribution period” by the IRS). Generally, IRA owners will use the “Uniform Lifetime Table” to determine their “distribution period.” If the IRA owner’s spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the “Uniform Lifetime Table,” the owner’s life expectancy is 22.9 years.
• Determining Age: Use the owner’s oldest attained age for the year of the distribution. Example: Suppose an IRA owner takes a distribution in February, when the owner’s age is 74, but later in November, turns 75. For purposes of determining the owner’s life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable.

Example: The IRA account owner is age 75 and the owner’s spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger than the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner’s life expectancy to be 22.9. The owner has three IRA accounts with a combined value of $87,000 ($25,000, $60,000 and $2,000) at the end of the prior year. The combined minimum distribution is $3,799 ($1,092 + $2,620 + $87, determined by dividing the value of each account by 22.9). (This is the same result as $87,000 / 22.9, but to comply with IRS rules, each account needs to be figured separately).

  

Uniform Lifetime Table – The following table is the one that is generally used to determine the Required Minimum Distribution from Traditional IRA accounts. Not illustrated, because of their size, are the Joint and Survivor Life Table used to determine RMDs when the sole beneficiary spouse is more than 10 years younger than the IRA owner and the Single Life Table used for certain beneficiary RMD determinations. For table values not illustrated, please call this office.

 

Timing of the Distribution – The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount. Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.

 

Maximum Distribution – There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.

 

Under-Distribution Penalty – Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required.

 

Example: The owner’s required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000).

 

If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused by completing applicable sections of Form 5329 and attaching an explanation. IRS will then determine if the penalty will be waived.

 

Not Required to File – Even though the IRA owner may not be required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution.

 

Death of the IRA Owner – If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.

 

If you are the beneficiary of an IRA or if you need assistance determining your RMD for 2011, please give our office a call.

 

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Do You Have Enough to Retire?

Generally, retirees need somewhere between 70 and 80 percent of their pre-retirement salary to maintain their current standard of living upon retirement. This includes income from company pension plans, Social Security benefits, individual retirement plans (such as IRAs, 401(k) plans, etc.) and other investments.

Do you plan to stay in your existing home or are you planning to downsize? Downsizing and relocating may provide additional cash and reduce expenses. How is your health and do you have reasonable medical coverage? When will you be eligible for Social Security and Medicare? What will supplement those benefits until you are eligible? These are some of the major concerns that need to be considered.

Our website offers interactive financial calculators and other tools to assist you with some day-to-day questions and concerns that may arise. A few examples of the interactive Retirement Calculators available:

• Retirement Planner: Quickly determine if your retirement plan is on track - and learn how to keep it there.
• Retirement Pension Planner: Plan your retirement with a company pension.
• Roth vs. Traditional IRA: Use this calculator to determine which IRA may be right for you.
• Retirement Shortfall: Running out of your retirement savings too soon is one of the biggest risks to a comfortable retirement. Use this calculator to find a potential shortfall in your current retirement savings plan.
• Retirement Income: Use this calculator to determine how much monthly income your retirement savings may provide you in your retirement.

Our website also offers interactive financial calculators in other areas such as tax, debt and credit cards, personal finance, mortgage, investments, and loans. To access the financial tools, click here.

Please note: While these financial tools are not a substitute for financial advice from a qualified professional, they can be used as a starting point in your decision making process. Please contact our office if you have any questions.

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Business & Rental Owners – Begin Collecting W-9s for 2011

If you use independent contractors to perform services for your business or rental and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses, and to avoid a monetary penalty. (This requirement generally does not apply for payments made in 2011 to a corporation.)

IRS Form W-9 (Request for Taxpayer Identification Number and Certification) is provided by the government as a means for you to obtain the data required (legal name, tax ID number, address) from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. It is highly recommended that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her.

Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize that the required documentation was not collected. Often, it is difficult to acquire the contractor’s information after the fact, especially from those contractors with no intention of reporting the income.

Let’s say that you have a repairman out early in the year, pay him less than $600, and then use his services again later. As a result, the total you’ve paid him for the year exceeds the $600 limit. You then realize that you do not have the information needed to file the 1099s for the year and will have to spend your valuable time contacting the repairman to obtain the information. Therefore, it is always good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you retain their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversight and protects you against IRS penalties and conflicts.

If you have questions, please call our office.

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2011 Standard Mileage Rates

The Internal Revenue Service has issued the 2011 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 51 cents per mile for business miles driven (includes a 22 cent per mile allocation for depreciation);
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.

The new rates for business, medical and moving purposes are slightly higher than last year’s, reflecting generally higher transportation costs compared to a year ago.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study for the IRS.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously (i.e., a fleet). In a change from past rules, the IRS has said that beginning in 2011 the mileage rate method may be used to figure business vehicle expenses for vehicles used for hire (such as a taxi), provided the business isn’t operating a fleet of vehicles.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

If you have questions, please call our office.

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Employers Must Stop Advance Earned Income Credit Payments in 2011

Advance earned income credit has been repealed for 2011. This credit allowed certain low-income employees to receive an advance payment of the earned income credit in their paychecks. Their withholding was lowered to take into account the payment. However, employers are cautioned that the advance earned income credit has been repealed beginning with the 2011 tax year. Therefore, they must stop the advance EIC credit payments effective for payroll payable in 2011.

If you have questions, please call our office.

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It's Tax Time!

Are You Ready?

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction;
• Better evaluate your options for reporting income and deductions to choose those best suited to your situation;
• Explore current law changes that affect your tax status;
• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

  

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later-year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

Sales of property. . . .

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation . . . .

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the new year, set up a safe storage location - a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

 

Other general suggestions to consider for your appointment preparation include . . .

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data - organizers are designed to remind you of transactions you may miss otherwise.)
• Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!
• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale.
• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.
• Compare deductions from last year with your records for this year. Did you forget anything?
• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details 

 

To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s), and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

 

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment.

Dependents

 

If you have qualifying dependents, you will need to provide the following for each:

• First and last name
• Social security number
• Birthdate
• Number of months living in your home
• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year.

To qualify as your dependent, an individual must pass several strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate, and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction. Purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents. If the property was inherited from someone who died in 2010, special complicated rules may apply in determining your inherited basis. Please call for further details.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends. If you sold mutual fund shares, you may have received a statement from the fund that shows your average cost basis for the shares sold and any “wash sale” adjustments; be sure to bring this statement to your appointment along with the purchase and reinvestment records you have.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy, and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Purchase of a Home: If you purchased a home during 2010 and you are a first-time homebuyer or a long-time homeowner, you may qualify for a substantial tax credit. Be sure to bring a copy of the escrow closing statement if you purchased a home.

 

Vehicle Purchase: If the car was a hybrid vehicle or one that qualifies as a lean burn vehicle, you may qualify for a special credit. Please bring the purchase statement to the appointment with you.

Home Energy-Related Expenditures: If you made home modifications to conserve energy (such as special windows, roofing, doors, etc.) or installed solar, geothermal, or wind power generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.

 

Ponzi Scheme or Bank Failure Losses: If you suffered losses as the result of a Ponzi scheme or as the result of a bank failure, there is special tax treatment for these types of losses. Please be prepared with the details of the losses and the amounts lost.

 

Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date and amount of the contribution. Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible unless verified by receipt from the charitable organization. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at $5,000 or more and other types of contributions, please call our office for additional requirements.

 

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Tax-Free IRA to Charity Distributions Reinstated

The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity has been reinstated for 2010 and 2011. The distribution is tax-free, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions.

The key benefits of this provision lie in the fact that the distribution:

1. Is not included in the taxpayer’s income for the year,
2. Counts toward the taxpayer’s minimum required distribution for the year, if any, and
3. Does count as a charitable contribution for the year (although not a deductible contribution).

 How does a taxpayer benefit from this provision? 

• By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions. 
• This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI-limited deductions.
• For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income. Thus, excluding the portion of the IRA distribution directly distributed to the charity can, in some cases, reduce the taxable portion of the SS.
• Taxpayers who wish to make very large contributions (up to the 100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.

  

  Caution – It is important to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income and the charitable deduction would be taken on the taxpayer’s itemized deductions subject to all the normal limitations. It may be appropriate to call this office before attempting to execute this strategy.

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Are You Required to File 1099s?

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses, and to avoid a monetary penalty. The 1099s for 2010 must be provided to the independent contractor no later than January 31, 2011.

In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by the last day of February. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records. Use the worksheet to provide us with the information needed to prepare your 1099s.

Please attempt to have the information to this office by January 20, so that the 1099s can be provided to the service providers by the January 31st due date.

If you have questions, please call our office.

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Federal Estate Tax Retroactively Reinstated

The Bush era tax cuts slowly phased out the federal estate tax and abolished it altogether for decedents dying in 2010, and replaced it with a rather complicated modified carryover basis regime. Just about everyone assumed Congress would reinstate the estate tax for 2010. As the year wore on, opinions began to change to where just about everyone predicted Congress would not reinstate the estate tax for 2010. Then out of the blue, mixed in with the GOP/Obama Administration compromise agreement tax provisions, was a proposal to retroactively reinstate the estate tax with a $5 million per person exemption and a tax rate of 35%.


Because the reinstatement occurred so late in the year, Congress is allowing a choice for 2010, providing the following two options:

1. Tax Option - Subject the estate to the estate tax provisions for 2010 and provide the beneficiaries with an inherited basis equal to the fair market value (FMV) of assets inherited from the decedent.

2. Modified Carryover Basis Option - Not pay the retroactive estate tax and instead utilize the modified carryover basis regime for determining the basis of inherited items.

For estates worth $5 million or less, the obvious choice would be the tax option of filing an estate tax return and taking advantage of the $5 million exemption, resulting in no tax and providing beneficiaries with an inherited basis of items equal to the items’ FMV at date of death. For larger estates, the question becomes more complex: pay the tax now and provide the beneficiaries with a FMV basis and perhaps a lesser tax in the future when the asset is sold, or avoid the tax now and possibly saddle the beneficiaries with a larger tax when they dispose of an asset in the future? These decisions will have to be made after considering the beneficiaries’ financial and tax circumstances, the intended use of the inherited property, and the makeup of the estate and the ability to pay the estate tax.

Another twist is a new provision that permits the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse, thus eliminating the need by most couples for complicated estate planning such as certain trust arrangements; this provision would take effect for decedents dying after 2010. But don’t get rid of that trust just yet! This extension is only through 2012, and based on prior performance, can we really trust Congress to develop a permanent solution to the estate tax by then? They had eight years to devise a permanent fix last go-around and waited until the 11th hour, only to come up with a two-year, temporary fix.

The $5 million per person exemption and top tax rate of 35% applies to estate, gift and generation skipping taxes through 2012, except the exemption amount will be inflation adjusted beginning in 2012, and the increase from $1 million to $5 million for the lifetime exemption for gifts applies for 2011 and 2012, but not 2010.

Modified Carryover Basis - The modified carryover basis essentially passes the decedent’s tax basis, with some adjustments, on to the beneficiaries so that the beneficiaries will be responsible for the tax on any appreciation over and above the decedent’s basis.

Example: A decedent owned 1,000 shares of Bank of America that were purchased for $2 a share and at the date of death were valued at $20 per share. Under the modified carryover basis regime the beneficiary’s basis would be $2 a share plus any allowable adjustment (discussed next) to that basis, not to exceed the FMV at date of death. Had the estate been taxed, the beneficiaries’ basis would have been $20 per share.

The allowable aggregate increases to basis (not to exceed the FMV at date of death) and allocated to specific inherited assets by the executor of the estate include:

• $1.3 million ($60,000 for a non-resident alien), plus
• The decedent’s unused capital loss carryovers, plus
• The sum of the decedent’s built-in losses (generally losses from the sale of the decedent’s investment or business property if it had been sold at FMV immediately before the decedent's death), plus
• The decedent’s unused net operating loss carryovers, and,
• If applicable, a spousal property basis increase of $3 million.

As you can see, allocating basis increases and figuring the modified carryover basis for each and every inherited item can be a significant task.

 

If you have questions, please give our office a call.

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New Reduced Payroll Tax for Employees Can Be a Headache for Employers

As part of the new tax cuts for 2011, the Social Security (OASDI) payroll tax withholding for employees has been cut by a full 2 percentage points from 6.2 percent to 4.2 percent of wages paid.

This late action has created problems for both the IRS and employers in implementing this last minute change. The IRS recently issued guidance to employers:

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than Jan. 31, 2011. Notice 1036 contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes.

The IRS recognizes that the late enactment of these changes make it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but no later than Jan. 31, 2011.

For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but no later than March 31, 2011.

If you use a payroll service or software, make sure they are updated for these changes. If you have questions, please give this office a call.

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