Great News – Major Exception Created to the $250 Per Incorrect Form 1099-R Penalty.

Posted by James M. Carlson
Dec 29 2015

It was only 4 months ago when the Trade Preferences Extension Act of 2015 was enacted. This law authorized an increase in the per 1099 form penalty from $100 per form to $250 per form. The $250 penalty applies to the 2015 1099 forms (including form 1099-R) to be filed after December 31, 2015.

Under existing law, there is a de minimis exception, but it is very limited. A filer cannot be penalized even if it has prepared forms with errors (any error no matter how small) as long as the incorrect forms do not exceed the greater of 10, or .005 times the total number of information returns required to be filed by the filer during the calendar year.

The new law creates two “additional” exceptions - if the dollar amount of the distribution is incorrect by $100 or less then the general rule is that such incorrect form is not one for which the IRS may impose the $250 penalty. And the same is true if the amount of federal withholding differs by $25 or less from the correct amount. The IRS may issue regulations to prevent the abuse of these new exceptions.

There is, however, an exception to the exception at least with respect to the individual’s form (i.e the payee statement). It appears the IRA custodian need not issue a corrected form to the IRS, but it will need to issue a corrected form or statement to the individual. If he or she so elects pursuant to procedures to be defined by the IRS.

Note that this new de minimis exception applies to returns required to be filed, and payee statements required to be provided, after December 31, 2016. That is, it applies to 2016 reporting forms and not to the 2015 reporting forms. This new exception is certainly good news. It is a small but reasonable change.

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President Obama Signs the Budget/Tax Bill on December 18, 2015.

Posted by James M. Carlson
Dec 06 2015

As last year, the President signed legislation Friday afternoon before travelling to Hawaii for a two week family vacation. This year he signed the “Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2016 (Consolidated Appropriations and Tax Measures).” Included in this law is the Protecting Americans From Tax Hikes Act of 2015.

There are 4 provisions impacting IRAs.

First, the qualified charitable contribution/ distribution (QCD) rules were adopted on a permanent basis. A distribution made during 2015 qualifies as a QCD if the following three rules were satisfied - the distribution occurs during 2015, it is for an amount up to $100,000 and the check is made payable to a qualifying charity.

It will be interesting to see if the IRS will change its current administrative practice for QCDs. That is, the IRA custodian prepares the Form 1099-R showing the distribution as being fully taxable and then the individual must explain on his or her tax return that the distribution is not taxable as he or she made a QCD. Because the QCD rules are no long temporary, one would think the IRS would now give serious consideration to assigning a special Form 1099-R code for the non-taxable QCD to expressly indicate the QCD is tax-fee.

Secondly, modified the Internal Revenue Code rules for making a roll over contribution into a SIMPLE-IRA. Under existing law, the only distribution which was eligible to be rolled over into a SIMPLE-IRA was if the distribution had come from another SIMPLE-IRA or the same SIMPLE-IRA. That is, it was impermissible for a person to rollover a distribution from a traditional IRA into a SIMPLE-IRA or from a 401(k) plan into a SIMPLE IRA, from a 403(b) plan into a SIMPLE-IRA or from certain other employer sponsored plans. The new rules are effective for distributions occurring on or after December 19, 2015.

Such distributions are now eligible to be rolled over into a SIMPLE-IRA as long as the individual has met the 2-year rule as set forth in Code section 72(t).

Presumably and hopefully, the IRS will be revising its two Model SIMPLE-IRA Forms (Form 5305-S and Form 5305-SA) because Article I of such forms provide, “In addition the trustee will accept transfers or rollovers from other SIMPLE-IRAs of the participant. No other contributions will be accepted by the trustee.” These forms were last revised in March of 2002 and as written do not allow for rollovers for distributions from any IRAs and plans other than another SIMPLE-IRA. CWF is revising its SIMPLE-IRA forms by adding this new rollover rule. Rollover certification forms will also need to be revised.

The IRS should also be issuing a revised Rollover Chart as set forth in Publication 590A.

Thirdly, a “technical” amendment was adopted extending the deadline for rolling over certain airline payment amounts. In the FAA Modernization and Reform Act, a person had been authorized to rollover certain airline payments received with respect to certain bankruptcies. The rollover had to be accomplished by August 4, 2012. Such rollover contribution was authorized and it was not subject to the annual contribution limit. The new tax law extends the deadline to be 180 days after December 18, 2015 or June 15, 2016.

The fourth IRA provision is discussed in the adjacent article discussing a new de minimis rule which creates a major exception so that an IRA custodian will be not be assessed the $250 penalty for an incorrect Form 1099-R.

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2015 IRA Contribution Deadline is Monday, April 18, 2016 Due to Emancipation Day

Posted by James M. Carlson
Nov 20 2015
The federal rule is that when April 15th falls on Saturday, Sunday or a legal holiday, then a tax return is considered timely if filed on the next succeeding day which is NOT a Saturday, Sunday or holiday. Emancipation Day is April 16th and it is a legal holiday in Washington, D.C. In some years this holiday will impact the deadline for filing federal income tax returns. In 2016, April 15th falls on Friday. However, Washington D.C. observes Emancipation Day on Friday since it falls on a Saturday. This means in 2016, April 15th is a holiday for federal income tax purposes. Consequently, the filing deadline for all tax forms and payments required to be filed or completed on or before April 15th (as described in Section 6072(a), including the Form 1040 returns) will be Monday April 18th, 2016. This April 18, 2016 deadline applies to traditional and Roth IRA contributions, HSA contributions and CESA contributions.

The federal rule is that when April 15th

falls on Saturday, Sunday or a legal holiday,

then a tax return is considered timely

if filed on the next succeeding day

which is NOT a Saturday, Sunday or holiday.

Emancipation Day is April 16th and it

is a legal holiday in Washington, D.C. In

some years this holiday will impact the

deadline for filing federal income tax

returns.

In 2016, April 15th falls on Friday.

However, Washington D.C. observes

Emancipation Day on Friday since it falls

on a Saturday. This means in 2016, April

15th is a holiday for federal income tax

purposes. Consequently, the filing deadline

for all tax forms and payments

required to be filed or completed on or

before April 15th (as described in Section

6072(a), including the Form 1040

returns) will be Monday April 18th,

2016.

This April 18, 2016 deadline applies to

traditional and Roth IRA contributions,

HSA contributions and CESA contributions.

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An IRA Distribution May Disqualify a Person For the Premium Tax Credit.

Posted by James M. Carlson
Nov 15 2015

The premium tax credit (PTC) is a refundable tax credit authorized under the Affordable Care Act. It assists individuals and families with low or moderate income to afford health insurance purchased through a health insurance marketplace. A person is ineligible for this credit if the health insurance coverage is purchased outside the marketplace. A person who is eligible to enroll in certain employer-sponsored coverage or government programs such as Medicare, Medicaid or TRICARE is ineligible. To be eligible and to obtain this credit a person must meet certain requirements and must file a federal income tax return. One of the requirements is that a person's household income must fall within a certain range.

If a person is receiving this credit, before taking any IRA distribution he or she will want to determine that such an IRA distribution will not make him or her ineligible to receive this credit. A person becomes ineligible for this credit if his or her household income exceeds more than 400% of the Federal poverty line for his or her family size. A person will be required to repay any advance payment he or she receives for which he or she later becomes ineligible. For 2015, the limit is $45,960 for an individual, $62,040 for a family of two and $94,200 for a family of four. A person will want to review Publication 974 and other IRS guidance.

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IRS Announces 2016 Limits for IRAs and Pension Plans

Posted by James M. Carlson
Oct 29 2015

The IRS announced the 2016 limits applying to IRAs and pension plans by issuing IRS news release 2015-119.

The Annual IRA contribution limits remain unchanged - $5,500 if the individual is younger than age 50 in 2015 or 2016, and $6,500 if he or she attains age 50 or older in 2015 or 2016

The maximum SEP contribution for 2016 is the same as for 2015: $53,000.

The SIMPLE IRA contribution limits are unchanged for 2016. The maximum elective deferral contribution amount is $12,500 for a person who is younger than age 50 in 2016 and $15,500 if he or she attains age 50 or older in 2016

The 401(k) elective deferral contribution limits also unchanged for 2016. The maximum elective deferral contribution amount is $18,000 for a person who is younger than age 50 in 2016 and $24,000 if he or she attains age 50 or older in 2016.

Only one of the compensation ranges applying to deductible IRA contributions increases for 2016.

The 2016 compensation range applying to a person whose filing status is married/joint return but not an active participant is $184,000 - $194,000 (up from $183,000 - $193,000).

Two of the compensation ranges applying to Roth IRA contributions will increase for 2016.

The 2016 compensation range applying to a person whose filing status is single, head of household or qualifying widower is $117,000 - $132,000 (up from $116,000 - $131,000).

The 2016 compensation range applying to a person whose filing status is married/joint return is $184,000 - $194,000 (up from $183,000 - $193,000).

Some of the compensation ranges applying to a savers tax credit also will increase.

CWF is revising its brochures and IRA Forms to incorporate the 2016 limits.

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Qualified Chariable Distributions in 2015

Posted by James M. Carlson
Oct 29 2015

The bill, Tax Relief Extension Act of 2015 was formally introduced in the Senate in August of 2015. It is S.1946. In general, it extends for two years numerous tax laws that expired as of December 31, 2013 or December 31, 2014. This bill would extend the rules for QCDs for tax years 2015 and 2016. Such an extension of the QCD Rules is estimated to cost $1.86 billion over 10 years.

The U.S. House of Representatives is considering its own version of a bill to extend certain expired tax provisions.

With today's change in the Speakership of the House of Representatives and the general political climate, it is unclear if the QCD laws will be extended for 2015 and 2016. My personal belief, it is more unsettled this year than in prior years. However, one can expect the Charitable industry and its lobbyists are working hard to extend this provision.

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The Obama Administration Proposes Taxing Some Roth IRA Distributions And Proposes Other Law Changes

Posted by James M. Carlson
Sep 28 2015

The 2016 election campaign has started. Taxes and the related topic of income inequality will be discussed. In fact, the Obama administration by releasing its 2016 Budget proposal has started the discussion. Below is a summary of the IRA and pension law changes as proposed by the Obama administration. Unsurprisingly, the proposals seek to reduce the tax benefits realized by individuals with higher incomes. Some of these proposals are new for 2016 and some are carryovers from the 2015 budget proposal.

  1. The law will “cap” the tax benefit (exclusion or tax deduction) that a person may receive from an IRA, 401(k) or other tax preferred plan at the 28% bracket. That is, those individuals in a higher tax bracket (33%, 35%, 39.6%, etc) would not be able to claim a tax deduction for the full amount or claim a full tax exclusion. This is the first proposal or discussion making some Roth IRA distributions taxable. New for 2016
  2. The standard RMD rules would apply to a person who had funds within a Roth IRA in the same manner as they know apply to funds within a traditional IRA, SEP-IRA and SIMPLE IRA. This change does not generate any additional tax revenues, but is being made to lower the amounts in Roth IRAs earning tax free income. Proposed in 2015. This change would only apply to those Roth IRA accountholders who attain age 70½ in 2016 or later
  3. Required distributions would no longer apply to individuals who had an aggregated balance of less than $l00,000 in IRAS, 401(k)’s and other retirement accounts. A special rule would apply in the case of certain defined benefit plans. Proposed in 2015
  4. A person who has after-tax dollars in an IRA or pension plan would lose the right to convert such dollars into a Roth IRA. That is, a person will be eligible to convert only “taxable” funds, he or she could not convert after-tax funds. New for 2016
  5. Require most non-spouse beneficiaries to take required distributions using the 5-year rule. The life distribution rule no longer could be used. This is a large revenue raiser and it raises greatly the taxes to be paid by non-spouse beneficiaries. This change would only apply if the IRA accountholder died on or after January 1, 2016
  6. The proposed law will “cap” the amount of funds a person may accumulate within tax preferred plans. This was also proposed in the 2015 budget proposal. The person would be required to aggregate the balance he or she has within personal IRAs with the balance within all employer sponsored retirement plans. Once a certain limit is reached, then no additional contributions could be made by the individual or by the individual’s employer on his or her behalf. The account balance could grow if due to earnings, but not on account of new contributions. The law would permit a person to accumulate an initial balance of $3,400,000 as that is the actuarial equivalent of a joint and 100% survivor annuity of $210,000 per year. The $210,000 limit would be adjusted for cost of living increases. CWF Observation. This proposal would greatly complicate the administration of IRAs and pension plans. There would be a tremendous increase in the need for actuarial and accounting services. It may well be an employee would need to inform his/her current employer what he/she has accumulated in his/her IRAs and other pension plans
  7. The proposed law would allow certain non-spouse beneficiaries who mistakenly are paid a distribution from an inherited to roll over such distribution if certain rules are met. This was also proposed in the 2015 proposal.
  8. The 401(k) plan rules would be changed so that an employer would have to let those employees working 500-999 hours per year for three consecutive years to be able to make elective deferral contributions. Under current law, an employer is not required to allow employees who work less than 1,000 hours to participate in the plan. Although the employer would have to let such employees make elective deferral, the employer would not be required to make any contributions, matching or profit sharing, on behalf of such employees.
  9. The IRS and the DOL are big fans of automatic enrollment pension plans. Under current law an employer’s decision to sponsor a pension or profit sharing plan is totally voluntary. Many small and moderate size employers choose to not offer a plan due to the regulatory complexity. The IRS and the DOL don’t seem to accept why so many employers choose to not offer such plans. Their solution, change the law so an employer must offer a simplified retirement plan. An employer with more than 10 employees which has been in business for at least two years would be required to offer a payroll deduction IRA program. Employees would automatically be enrolled to have 3% of compensation withheld unless they expressly waived coverage. An employee could have a larger percentage withheld. Funds could go into either a traditional IRA or a Roth IRA. To offset some of the cost for maintaining this plan there would various tax credits extended to the small employers
  10. The current tax rules applying to the taxation of net unrealized appreciation would be repealed. The general tax rule is, when a person takes a distribution from his or her IRA or 401(k) plan, such amount is combined with other wage or ordinary income for such year and taxed at the applicable marginal income tax bracket. Many times a person will move into a higher tax bracket on account of the IRA/401(k) distribution. Current law allows an employee who has been distributed employer stock to be taxed differently. He or she will include the cost basis of the stock in his or her income for the year of distribution, but is able to defer further taxation to when the stock is subsequently sold. There is no time limit by when the individual must sell the stock. It may be the government won’t see any tax revenues for 20-50 years. Example. Jane works for ABC, Inc from ages 22-38. Her employer has a profit sharing that invests in employer stock. The corporation has been very successful. The corporation contributes stock which at the time contributed had a cost basis of $45,000, but has a value of $450,000 when distributed to her. Although she has various options, she elects to have the stock distributed to her in-kind. Under this method she includes the $45,000 in her income and pays tax on such amount. Now assume the stock appreciates to $600,000 and she then decides to sell the stock. She would have $555,000 of long term gain and it would be taxed at a rate of 28% under current law. That is, she will not pay any tax on the stock appreciation until she sells the stock. And at that time she will most likely qualify to pay tax at then existing capital gain rates on the stock gain. The current tax rate is 28% but there were times during 2009-2012 when the tax rate was 10%, 15% or 20%. This change would not apply to a person who was age 50 or older as of December 31, 2015
  11. The current tax laws allowing a publicly traded company to claim a tax deduction for dividends paid with respect to stock held in an ESOP would be repealed.
  12. Current law permits an employer to offer various annuity investments within the employer plan. However, an employer may decide to liquidate such investments as it can liquidate other investments. The proposal is that the law would be changed to give each participant the right to rollover the annuity to an IRA or other retirement account via a direct rollover even though he or she was not otherwise eligible for a distribution. As mentioned in prior newsletters, insurance companies have a tremendous political lobby. Although the odds of these Obama proposals becoming law before November of 2016 are slim at best, they certainly will be discussed during the upcoming election period along with many other tax subjects. Note, the Obama administration is not asking for the extension of the Qualified Charitable Distribution (QCD) rules for 2015 and subsequent years. The charitable industry almost has a political lobby as strong as the insurance companies. Time will tell if the QCD rules are extended permanently, temporarily or not at all.

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SIMPLE-IRA Summary Description — IRA Custodian Must Furnish by October 2015 for 2016

Posted by James M. Carlson
Aug 19 2015

What are a financial institution’s duties if it is the custodian or trustee of SIMPLE IRA funds? After a SIMPLE IRA has been established at an institution, it is the institution’s duty to provide a Summary Description each year within a reasonable period of time before the employees’ 60-day election period. CWF believes that providing the Summary Description 30 days prior to the election period would be considered “reasonable.” The actual IRS wording is that the Summary Description must be provided “early enough so that the employer can meet its notice obligation.” You will want to furnish the Summary Description to the employer in September or the first week of October. The employer is required to furnish the summary description before the employees’ 60-day election period.

IRS Notice 98-4 provides the rules and procedures for SIMPLEs.

The Summary Description to be furnished by the SIMPLE IRA custodian/trustee to the sponsoring employer depends upon what form the employer used to establish the SIMPLE IRA plan.

The employer may complete either Form 5305-SIMPLE ( where all employees’ SIMPLE IRAs are established at the same employer-designated financial institution ) or Form 5304-SIMPLE ( where the employer allows the employees to establish the SIMPLE IRA at the financial institution of their choice ).

There will be one Summary Description if the employer has used the 5305-SIMPLE form. There will be another Summary Description if the employer has used the 5304-SIMPLE form. If you are a user of CWF forms, these forms will be Form 918-A and 918- B.

The general rule is that the SIMPLE IRA custodian/trustee is required to furnish the summary description to the employer. This Summary Description will only be partially completed. The employer will be required to complete it and then furnish it to his employees. The employer needs to indicate for the upcoming 2016 year the rate of its matching contribution or that it will be making the non-elective contribution equal to 2% of compensation.

In the situation where the employer has completed the Form 5304-SIMPLE, the IRS understands that many times the SIMPLE IRA custodian/trustee will have a minimal relationship with the employer. It may well be that only one employee of the employer establishes a SIMPLE IRA with a financial institution. In this situation, the IRS allows the financial institution to comply with the Summary Description rules by using an alternative method. To comply with the alternative method, the SIMPLE IRA custodian/trustee is to furnish the individual SIMPLE IRA accountholder the following:

  • A current 5304-SIMPLE — this could be filled out by the employer, or it could be the blank form
  • Instructions for the 5304-SIMPL
  • Information for completing Article VI ( Procedures for withdrawal ) (You will need to provide a memo explaining these procedures. )
  • The financial institution’s name and address. Obviously, if an institution provides the employee with a blank form, he/she will need to have the employer complete it, and, the employee may well need to remind the employer that it needs to provide t he form to all eligible employees.

CWF has created a form that covers the “alternative” approach of the Summary Description being provided directly to an employee.

The penalty for not furnishing the Summary Description is $50 per day.

Special Rule for a “transfer” SIMPLE IRA.

There is also what is termed a “transfer” SIMPLE IRA. If your institution has accepted a transfer SIMPLE IRA, and there have been no current employer contributions, then there is no duty to furnish the Summary Description. If there is the expectation that future contributions will be made to this transfer SIMPLE IRA, then the institution will have the duty to furnish the Summary Description.

Reminder of Additional Reporting Requirements

The custodian/trustee must provide each SIMPLE IRA account holder with a statement by January 31, 2016, showing the account balance as of December 31, 2015 , (this contribution and distribution is the same as for the traditional IRA ), and include the activity in the account during the calendar year ( this is not required for a traditional IRA ). There is a $50 per day fine for failure to furnish this statement ( with a traditional IRA, it would be a flat $50 fee )

Categories: Pension Alerts, SIMPLE IRAs

Roth IRA Conversions, Is it Worthwhile For a Person to Change State of Residence Before Converting ?

Posted by James M. Carlson
Jul 15 2015

For most individuals it will not be worth the effort or the inconvenience to change their state of residence prior to doing a Roth IRA conversion contribution. For others, not having to pay state income tax on the conversion will make it worthwhile.

When one converts the funds within his traditional IRA to a Roth IRA, he will include the taxable amount in his income for federal income tax purposes.

What about state income tax? Individuals residing in states with incomes taxes will also need to pay state income tax on the amount converted if they reside in a state that assesses an income tax. For some, this may be substantial as the highest tax rate is the following in: ( California-13.3%, Hawaii- 11.01%, Oregon-9.9%, Minnesota- 9.85%, Iowa - 8.98%, New Jersey- 8.97%, New York-8.82%, etc.).

For example: An individual residing in California, New York, Michigan, Minnesota, Iowa or any other state with an state income tax may wish to move to a state with no income tax ( Texas, Florida, Tennessee, Nevada, Wyoming, Washington, and South Dakota. ) for the period required under the various state laws to avoid paying the state income tax with respect to his Roth IRA conversion.

For most individuals it will not be worth the effort or the inconvenience, but for others the tax savings will make it worthwhile to move to a state without a income tax for a certain time period so that the individual may convert his or her Roth IRA and avoid paying state income tax. Under current laws, a person could return to his “home” state later after doing the conversion while residing in another state. Time will tell if these states will enact laws giving them the right to try to tax such funds even though the conversion had occurred when a person was a non-resident.

Categories: Pension Alerts, Roth IRAs

A Person’s 2015 Tax Filing Deadline Is Either April 18, 2016 or April 19, 2016

Posted by James M. Carlson
Jun 12 2015

April 15, 2016 is a Friday. For the reasons discussed below, April 15th is NOT the filing deadline or the last day to make IRA contributions for tax year 2015.

Residents of Massachusetts and Maine have until April 19th, 2016 (a Tuesday) to file their 2015 federal income tax returns and make their 2015 IRA contributions. Residents of the other 48 dates have until Monday, April 18, 2016.

The IRS recently issued Rev. Rul 2015- 13 to discuss for 2015 tax purposes the interplay between two different holidays, Emancipation Day and Patriot’s Day and the rule that a tax return is considered timely if it is filed on the next succeeding day that is not a Saturday, Sunday or legal holiday.

Emancipation Day is a legal holiday recognized in the District of Columbia. The IRS has ruled that the observance of this legal holiday has implications nationwide. Emancipation Day is April 16th of each year. However, if the 16th falls on saturday, the holiday is observed on the preceding Friday (i.e. the 15th) and if the 16th falls on Sunday, it is observed on the following Monday (i.e. the 17th). In both cases the tax filing deadline of April 15th will be revised since the tax filing deadline cannot be a Saturday, Sunday or legal holiday. It wil be the next day following a Saturday, Sunday, or legal holiday which itself is not a Saturday, Sunday or legal holiday.

Patriot’s Day is a legal holiday in the states of Maine, and Massachusetts. It is observed on the third Monday in April. April 18, 2016 is the third Monday in April.

Because some taxpayers could elect to file their federal income tax returns by hand in Massachusetts and Maine at their local IRS office on Monday April 18, 2016, and their deadline would be April 19th since April 18th is a state holiday, the IRS has ruled that all residents of Massachusetts and Maine will have until April 19, 2016 to file their 2015 tax return and make IRA contributions for 2015.

The deadline for the residents of the other 48 states is Monday, April 18, 2016.

However, the deadline for a taxpayer to make his or her estimated tax payments for the fourth quarter 2015 and the first quarter for 2016 is April 18, 2016 for everyone, including the residents of Massachusetts and Maine.

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