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Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Our offices will be closed on January 1. Happy New Year!
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Our offices will be closed on January 1. Happy New Year!
You might have heard about the “Taxpayer Bill of Rights” recently released by the IRS. What’s that all about? The current IRS Commissioner, John Koskinen, and the National Taxpayer Advocate, Nina Olson, announced the Taxpayer Bill of Rights at a news conference in Washington, D.C., in June 2014. The new Taxpayer Bill of Rights is intended to better communicate to taxpayers their existing statutory and administrative protections. Like the U.S. Constitution’s Bill of Rights, there are 10 broad provisions in the Taxpayer Bill of Rights. They are:
The IRS acknowledged that as an institution, it needed to do a better job of communicating to taxpayers the rights that do exist for taxpayers and that the IRS respects those rights and has a responsibility to treat taxpayers fairly.
A recent U.S. Tax Court decision has challenged a long-accepted understanding of how the 60-day IRA rollover rules work. In Bobrow v. Commissioner, the court ruled that the once-per-year rollover rule applies in aggregate to all of a taxpayer’s IRA accounts and not on an account by account basis. This position is inconsistent with the IRS’ own Publication 590 and proposed regulations written better than 30 years ago. Due to the significance of this decision, we felt it important to highlight the key points you need to know to steer clear of problem areas with IRA rollovers going forward.
Withdrawals from IRA accounts are normally taxable but the standard rollover rule of IRC Sec. 408(d)(3)(A) stipulates that as long as the funds are rolled over within 60 days, the distribution will not be taxable. To prevent abuse, IRC Sec. 408(d)(3)(B) applies a limitation whereby the 60-day rollover rule cannot be utilized more than once in a one-year period (measured as 365 days from the date that the first distribution occurred).
Historically, this rollover rule has been applied on an account-by-account basis. For example, if an individual has two IRA accounts and takes a distribution from IRA # 1 that is rolled over into a new IRA account (IRA # 3), then no further rollovers can occur from IRA # 1 or IRA # 3 during the next year since both accounts have already participated in one rollover in a one-year period. The rollover from IRA # 1 into IRA # 3, however, has never prevented a taxpayer from making a tax-free rollover from IRA # 2 into any other traditional IRA, during this same one-year period – at least until the Bobrow decision.
The IRS issues Publication 590 annually to assist taxpayers in preparing their individual income tax returns. The example cited above has been in Publication 590 for better than 20 years and is based on language in IRS proposed regulations introduced in 1981. Soon after the court’s decision, the IRS issued Announcement 2014-15 which adopted this less taxpayer-friendly interpretation of the IRA rollover rules. The IRS also announced that they plan to revise Publication 590 in the near future.
The IRS has acknowledged that because this was a significant departure from the standard view on the IRC Sec. 408(d)(3)(B) rollover limitation – including the IRS’ own position – no new regulations will take effect before January 1, 2015. In addition, the IRS has declared that it will not pursue the Bobrow interpretation for any rollover that involves an IRA distribution occurring before January 1, 2015.
Why did the tax court decide the Bobrow case the way it did? Most likely, it was to prevent taxpayers from using IRA funds as a form of temporary loan – one that could be chained together through a sequence of IRA rollovers. The prior interpretation of the IRA rollover rules could have provided taxpayers with several different IRA accounts the ability to stretch their IRA loans out over extended periods of time. Tax-free use of a taxpayer’s IRA funds was certainly not the original intent of Congress when IRA accounts were first introduced back in 1974. It is likely the IRS felt the rollover limitation rule of IRC Sec. 408(d)(3)(B) was being abused by the taxpayers in the Bobrow case enabling them to use their various IRA accounts for multiple short-term loans. The taxpayers were, in essence, attempting to “game” the system.
The bottom line for taxpayers is that beginning on January 1, 2015 the IRA rollover rule will now apply aggregated across all IRA accounts of the taxpayer. This means the once-per-year rollover limitation is not just a per-IRA limitation but a per-taxpayer limitation (i.e., a taxpayer can only do one rollover across any/all of his IRA accounts during a 365-day period).
If a taxpayer attempts to make more that one IRA-to-IRA rollover within a 365-day period, the consequences could be severe. The second (third, fourth, etc.) rollover within the 365-day period will be considered a distribution which, for traditional IRAs, will generally be subject to income tax and, if the IRA owner is under 59 ½ years of age, the 10% penalty. For Roth IRAs, the distribution may be subject to income tax and/or the 10% penalty. And if that’s not bad enough, subsequent distributions erroneously “rolled over” during the 365-day period could result in excess contributions in the receiving account, subject to the 6% excess contribution penalty for each year they remain in the account.
a) Trustee-to-Trustee IRA Transfers – This is the best way for IRA money to be moved from one IRA to another. The funds go directly from one custodian to another without the account owner having an opportunity to use the funds while they are outside the IRA. When IRA funds are moved this way, there is no 60-day deadline and the once-per-year rule does not apply. IRA owners may make as many trustee-to-trustee transfers as they desire, and at any time.
b) Plan-to-IRA Rollovers – The once-per-year rollover rule is an IRA-to-IRA and Roth IRA-to-Roth IRA rule. So, if a taxpayer makes a rollover that is not between two IRAs or two Roth IRAs, it does not count as a rollover for purposes of the once-per-year rule. For example, if a taxpayer rolls over money from their 401(k) to an IRA on January 25th of year 1 and then rolls that money via a 60-day rollover to another IRA on March 10th of the same year, the once-per-year rule has not been violated.
c) IRA-to-Qualified Plan Rollovers – Similar to the Plan-to-IRA rollover exclusion outlined above, IRA-to-Qualified Plan rollovers also do not count as rollovers for purposes of the once-per-year rollover rule.
d) Roth IRA Conversions – If money is converted from an IRA or employer plan to a Roth IRA, the conversion – which is technically a rollover – does not count as a rollover for purposes of the once-per-year rule.
If you are considering an IRA rollover, make sure it will meet the applicable rules and survive IRS scrutiny. We are here to assist you in determining the best course of action and to answer any questions. Contact us at (719) 630-1186.
Summer is the time for sunshine, vacations, and often weddings! If you’re getting married this year, we know you’re probably focused on things like the dress, the venue, the food, etc.
As your accounting firm, we want to remind you of some things you should know considering your finances. Here are 5 important things newlyweds should know:
These are just a few things to think about when you come back from your honeymoon. If you have questions about how your new marriage will affect other financial matters, please contact us at (719) 630-1186. We’re glad to help!
– See more at: https://www.skrco.com/blogs/news-and-tax-alerts/2014/7/10/5-things-newlyweds-should-know-for-2014#sthash.4I9xBJzW.dpuf
It’s summertime! And although that means vacations and tans for many of us, it may also mean for students that it’s time to get a summer job. Whether your student finds work mowing lawns, babysitting or working in a restaurant, there are some things they should be aware of. If it’s their first job, it gives them a chance to learn about the working world – and that includes taxes!
The Internal Revenue Service has put together a list of eight things that students who take a summer job should know about taxes:
1. Don’t be surprised when your employer withholds taxes from your paychecks. That’s how you pay your taxes when you’re an employee. If you’re self-employed, you may have to pay estimated taxes directly to the IRS on certain dates during the year. This is how our pay-as-you-go tax system works.
2. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use it to determine how much federal income tax to withhold from your pay.
3. Keep in mind that all tip income is taxable. If you get tips, you must keep a daily log so you can report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.
4. Money you earn doing work for others is taxable. Some work you do may count as self-employment. This can include jobs like baby-sitting and lawn mowing. Keep good records of expenses related to your work. You may be able to deduct (subtract) those costs from your income on your tax return. A deduction may help lower your taxes.
5. If you’re in ROTC, your active duty pay, such as pay you get for summer camp, is taxable. A subsistence allowance you get while in advanced training isn’t taxable.
6. You may not earn enough from your summer job to owe income tax. But your employer usually must withhold Social Security and Medicare taxes from your pay. If you’re self-employed, you may have to pay them yourself. They count toward your coverage under the Social Security system.
7. If you’re a newspaper carrier or distributor, special rules apply. If you meet certain conditions, you’re considered self-employed. If you don’t meet those conditions and are under age 18, you are usually exempt from Social Security and Medicare taxes.
8. You may not earn enough money from your summer job to be required to file a tax return. Even if that’s true, you may still want to file. For example, if your employer withheld income tax from your pay, you’ll have to file a return to get your taxes refunded.
Contact your CPA or visit IRS.gov for more about the tax rules for students.
Summer should be a time for new adventures, but the excitement and energy surrounding this season can quickly turn south as working parents begin to wonder how they will ensure their child is cared for and entertained during the summer months. While many parents use
child care year-round, summertime can offer unique opportunities and challenges.
The costs can certainly add up, but you may qualify for a federal tax credit that can lower your taxes. The IRS has put together some facts you should know about the Child and Dependent Care Credit.
1. Your expenses must be for the care of one or more qualifying persons. Your dependent child or children under age 13 usually qualify. For more about this rule see Publication 503, Child and Dependent Care Expenses.
2. Your expenses for care must be work-related. This means that you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return. Your spouse meets this rule during any month they are a full-time student. They also meet it if they’re physically or mentally incapable of self-care.
3. You must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care. This rule also applies to you if you file a joint return.
4. As a rule, if you’re married you must file a joint return to take the credit. But this rule doesn’t apply if you’re legally separated or if you and your spouse live apart.
5. You may qualify for the credit whether you pay for care at home, at a daycare facility or at a day camp.
6. The credit is a percentage of the qualified expenses you pay. It can be as much as 35 percent of your expenses, depending on your income.
7. The total expense that you can use for the credit in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.
8. Some exclusions to note: Overnight camp or summer school tutoring costs do not qualify. You can’t include the cost of care provided by your spouse or your child who is under age 19 at the end of the year. You also cannot count the cost of care given by a person you can claim as your dependent. Special rules apply if you get dependent care benefits from your employer.
9. Keep all your receipts and records. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your tax return.
10. Remember that this credit is not just a summer tax benefit. You may be able to claim it for care you pay for throughout the year.
These tips are taken from IRS Special Edition Tax Tip 2014-16