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Roth IRAs

03/17/2017

Saver's Credit Option Offers Rewards

Hand holding moneyThere’s a little known tax credit for people who have low to moderate income and are putting money aside to save for retirement.  The Saver’s Credit is available to eligible taxpayers to use in conjunction with the tax deduction they may already have qualified for by contributing to an IRA.

If your adjusted gross income is below $30,750 as an individual, $46,125 as a head of household or $61,500 as a married couple in 2016, you might be eligible for tax credit.  It can be worth between 10 and 50 percent of the amount you contribute to an IRA up to $2,000 for individuals and $4,000 for couples.  You would receive the tax credit on top of the benefits of a tax-free or tax-deferred retirement fund contribution.

The Saver’s Credit applies to contributions made to a traditional or Roth IRA, a 401(K) plan, a SIMPLE IRA, a SARSEP, your 403(b) plan, 501(c)(18) plan or a governmental 457(b) plan.  Voluntary after-tax employee contributions to a qualified retirement and 403(b) plans may also be eligible for the tax credit.

Find out more by clicking here for detailed information.

03/16/2017

IRA Moves That Save Tax Dollars

There’s still time to reduce your 2016 tax bill as you take steps to maximize the benefits of saving money for retirement.  There are different strategies that can save money or defer taxes through contributing to IRAs and retirement funds each tax year.  For the 2016 tax year, you have until April 18th to make a move. However, if you do make a qualifying IRA contribution between January 1 and April 18, make certain you specifically instruct your financial institution to apply the deposit to the 2016 tax year.  Otherwise, the deposit may automatically be considered a 2017 deposit.

Taxes and moneyUsing a Tax Refund for Tax Savings  Here’s another tip regarding your tax refund and saving for retirement: consider depositing all or part of your tax refund directly into an IRA.  It saves a step by directly depositing the money, it can speed up the timing of the contribution and ensures the deposit is made as you intend.  With a direct deposit, you can even choose to use your 2016 refund to pay for the amount of your 2016 IRA contribution as long as the tax return can be processed and the refund paid before the April 18th deadline. You would designate on Form 8888 “Allocation of Refund” how much of your refund should be deposited directly into your IRA and that it should be designated as your 2016 contribution.

How Much You Can Save  A working taxpayer can defer paying income tax on a contribution of pre-tax dollars up to $5,500 to a Traditional IRA and may split contributions to more than one IRA.  Income tax won’t be due on the money until it is withdrawn from the account.  Contributions to a Roth IRA are after-tax dollars and do not qualify for a tax deduction, though qualified distributions may be withdrawn tax-free at retirement. Contributions to both Traditional and Roth IRAs are limited depending upon modified adjusted gross income.

The actual amount of the tax deduction on a Traditional IRA depends upon the taxpayer’s income tax rate.  For example, a worker in the 25% tax bracket may save $1,375 in income taxes by making the maximum IRA contribution.  Workers in the 35% tax bracket may save $1,925 for the same contribution amount.

If you are age 50 and above, you may contribute an additional $1,000 to an IRA up to a total tax-deductible contribution of no more than $6,500. For example, the tax deduction can range from $975 for individuals in the 25% income tax bracket to $2,275 for those who are in a 35% tax bracket.

Married couples can double their tax deduction if they make the maximum contribution to an IRA in each spouse’s name.  Even if one of the spouses doesn’t work, a contribution can be made for that spouse subject to the spousal IRA limit. The combined contributions must be no more than $11,000 if both are under age 50, $12,000 if one spouse is 50 or older and $13,000 if both are at least 50 years old.

Who Qualifies For Tax Deduction  A taxpayer must earn income in order to save in an IRA. If a worker has no retirement plan at work, the tax deduction for Traditional IRA contributions is allowed in full regardless of income.  If a person or spouse has a retirement plan at work, the tax deduction and the contributions may be limited.  Amounts for both the allowable deduction and contributions phase out at higher income levels calculated as modified adjusted gross income.

People aged 70 ½ and older may no longer claim a tax deduction for their contributions to Traditional IRAs. Upon reaching that age, the fund’s owner must start taking required minimum distributions (RMDs).  Any deductible contributions and earning withdrawn from a Traditional IRA are taxable. Early withdrawals by a person under the age of 59 ½ may be subject to a 10% penalty.  Contributions made to a Roth IRA can be made after age 70 ½ and the amount in the account can be left there as long as the person lives. Qualified distributions are generally not taxable, but early withdrawals are subject to a 10% penalty.

Click here for a description of the difference between Traditional and Roth IRAs.

02/14/2017

Saving with myRA

The US Department of Treasury is offering the new myRA retirement savings account for people who have no access to a retirement savings plan at their job or lack other options to save.  It is a simple fund that is easy and free to open.  The idea is that if you give people a bit of help, they will learn the benefits of saving money and begin new habits that will last a lifetime.

MyRA logoA myRA account earns interest at the same rate as investments in the Government Securities Fund (average annual return of 2.94% over the last ten years) which are backed by the US Treasury.  It costs nothing to open the account and there are no fees.  A myRA is operated under Roth IRA Rules, so there is an annual contribution limit of $5,500 ($6,500 for individuals 50 years of age or older).  The fund is limited to a maximum $15,000.

The fund’s owner may withdraw any amount of money at any time tax-free and with no penalty.  The money can also be transferred to a private-sector Roth IRA at any time with no penalty.

Contributions may be made from direct deposits from a person’s paycheck, checking or savings account, and a federal income tax refund by marking the “savings” box on the refund section of a return.

The fund is designed to be a part of what is described as a “larger savings journey” with online tracking tools including a myRA Savings Goal calculator.  For more information, click here to visit the “Get Answers” page of the myRA website.

01/15/2016

Tax Extenders & The Deficit Dilemma

Though Congress has received some applause for reviving a set of more than 50 tax breaks, called “tax extenders,” there is as much dismay-driven head shaking over the fact that the bipartisan agreement and the now signed budget bill dig the federal deficit hole even deeper.

The new tax law, entitled the Protecting Americans from Tax Hikes (PATH) Act of 2015, and the newly signed funding bill provide $1.1 trillion to cover spending for most government agencies to the end of fiscal year 2016, perhaps coincidentally past the upcoming presidential election. The defense sector, NASA, the Food and Drug Administration and the National Institutes of Health received a bit of a boost with most other agency funding remaining flat. ENews 2016 pic tax-credit3

IRS funding restrictions remain, so it’s expected that taxpayers will continue experiencing communication and customer service problems and an increase in computer-generated correspondence audits throughout 2016 and 2017. The new National Taxpayer Advocate Annual Report to Congress blasts the IRS for planning to “substantially reduce telephone and face-to-face interaction with taxpayers,” turning that job over to tax return preparers and tax software companies.

Meanwhile, the good news for taxpayers is that the PATH Act makes permanent several charitable tax provisions, indicating that lawmakers support using tax incentives to encourage charitable giving. For example, those 70 ½ or older may contribute up to $100,000 from an IRA directly to a charity with the contribution qualifying for their required minimum distribution (also known as Qualified Charitable Distribution (QCD) rules).

Other permanently renewed tax provisions include the American Opportunity Tax Credit for college expenses and the deduction for state and local sales taxes. The schoolteacher expense deduction has been enhanced and made permanent, as has the child tax credit.

The mortgage insurance premiums and qualified residence interest deductions have been extended for another year. Taxpayers who suffered losses from selling their home for less than the outstanding mortgage will also be able to avoid the tax consequences from debt cancellation under the Mortgage Debt Relief Act for another year.

Companies that utilize bonus depreciation like those involved in the telecommunications industry or who invest in capital-intensive projects will continue enjoying this helpful tax provision for a few more years. The tax law also makes permanent the research and development tax credit, which encourages important business R&D like that in the pharmaceutical and defense sectors.

The solar investment tax credit (ITC) and the wind production tax credit (PTC) are being phased out but will remain active through 2019 and 2021 respectively. The energy industry overall has received both tax incentives and funding resources, adding a boost of confidence to alternative energy producers.

Tax increases levied on individuals and businesses to pay for the Affordable Care Act (Obamacare) continue to be unpopular, and some were not enacted. Now it’s possible the two most controversial taxes may be repealed. These are the proposed tax on medical devices and the 40% excise “Cadillac” taxes on higher-priced employer-sponsored health plans that compete with government-sponsored plans.

The 2015 year-end budget battle, which starts our new tax year without delays, was a fistfight compared to the combative, destructive delay-causing 2014 debate. Yet, even as lawmakers are cooling to budget debates, the looming budget deficit has not disappeared and continues to grow. Our 2016 budget will add to the deficit, rather than reduce it. The Congressional Budget Office reports that overall US Treasury debt has grown to 74% of GDP that “could have serious negative consequences for the nation, including restraining economic growth in the long term ... and eventually increasing the risk of financial crisis.”

Overall, the bipartisan tax bill was passed with the understanding that Congress is committed to comprehensive tax reform that will simplify the tax code, eliminate temporary provisions and lower tax rates by broadening the tax base. Lawmakers who supported the PATH Act stated in a news release, “Americans deserve a simpler, fairer and flatter tax code that’s built for growth, and this bill will help make that possible.” The 2016 election year will likely determine how far that ship will sail.

If you have any questions about how the current tax law affects your individual and/or business tax obligation, please contact us now at McRuer CPAs for a tax planning session.

04/07/2015

Social Security Disability In Trouble

Officials report the Social Security Disability Insurance (SSDI) program is in trouble financially and in less than two years is expected to not be able to pay full benefits.

Social-security-disabilitySSDI provides supplemental income to the mentally or physically disabled who cannot work full-time.  The Social Security Administration reports that more than 11 million Americans receive SSDI payments each year.

The SSDI has petitioned lawmakers to access funds in the broader, less financially stressed Social Security retirement program until its own funding deficit can be solved.

It’s not surprising that positions about this issue divide along party lines. Republicans want the SSDI to fix its underlying costly administration structure that drains funds, which could otherwise be paid as benefits.  They also want to change eligibility requirements to limit benefit payments to those who are most needy. 

Democrats claim the Republicans had already targeted SSDI for budget cuts and are using the current fiscal crisis as a way to cut benefits overall creating "a crisis where none exists.”  They say Republicans are refusing for political reasons to accept a proposal supported by President Obama that they claim could fix the problem.  A number of Democrats are pushing for increases in both disability and social security retirement benefits.

Financial and political analysts agree the issue will be a major debate topic and will be one of the first action items the next President must address in early 2016.

The health of the larger Social Security retirement fund remains unclear.  Annual reports predict the fund will be depleted by 2033.  The Heritage Foundation confirms the cash-flow deficit began in 2010 when $51 billion in benefits were paid above what was received in payroll taxes, and numbers show the deficit is getting worse each year.  An effort to reallocate funds from one resource to another is considered a temporary fix.  At the present payment rate all reserve funds may dry up in 20 years.

Some proposed solutions include increasing the Social Security tax from 6.2% to 7% of earnings, changing the cost-of-living adjustment, enacting a means test that would reduce or eliminate social security for retirees with higher incomes, and raising the retirement age to 68.

If you have questions about how your retirement plans may be affected by Social Security funding issues, contact McRuer CPAs for a review of your strategies and goals.

03/19/2015

April 1st Deadline - No Fooling!

IRA payThe IRS has issued a reminder to taxpayers who may have turned 70 1/2 years old in 2014.  April 1st is the deadline to begin receiving their retirement plan distributions from IRAs and work place related retirement plans.

Here is the actual release from the IRS with more information and with links to more information including videos and tax forms.  Please contact us online or call us at 816.741.7882 if you have any questions.

-------------IRS RELEASE March 19, 2015 -------------------

WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned 70½ during 2014 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Wednesday, April 1, 2015.

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, a taxpayer who turned 70½ in 2014 and receives the first required payment on April 1, 2015, for example, must still receive the second RMD by Dec. 31, 2015. 

Affected taxpayers who turned 70½ during 2014 must figure the RMD for the first year using the life expectancy as of their birthday in 2014 and their account balance on Dec. 31, 2013. 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-B.

Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2014 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period 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 Accumulation inPublication 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 2015. 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 2015 RMD, this amount would be on the 2014 Form 5498 that is normally issued in January 2015.

More information on RMDs, including answers to frequently asked questions, can be found on IRS.gov.

11/24/2014

McRuer CPAs Year-End Tax Planning Guide

Income tax and flag imageIt's time to review year-end tax strategies that may help reduce your tax bill or prevent you from paying more than you owe.  

The 2014 tax year has been marked by more questions and unresolved tax issues than in years past.  The current uncertainty especially about expiring "temporary" tax provisions, income tax deductions and IRA conversions leads us to send a precautionary "yellow" signal as we stay alert to react to any last minute updates.

Click here to download the McRuer CPAs 2014 Year-End Tax Planning Guide with tips and information that may help you.

Your window of opportunity to take action regarding your 2014 tax obligation is rapidly closing, but remember, this is also a very good time to consider choices about your individual and/or business tax strategies for the 2015 tax year.

If you haven't already scheduled your year-end tax planning strategy session, please contact us right away.  Call us for an appointment with one of our tax strategy experts who will explain details to help you choose the best plan for you: 816.741.7882.

 

02/18/2014

IRAs Need Updated Designated Beneficiary Forms

Individual Retirement Accounts have been around long enough now that many Americans are learning what happens when they inherit an IRA. It’s not always good news.  If the owner has not filed an up-to-date beneficiary form, the heir of the estate risks losing a major portion of the IRA value to taxes and fees. IRA-nest-egg

The Employee Benefit Research Institute (EBRI) reports the average IRA value is close to $94,000. The EBRI also says there are nearly 15 million IRA accounts held by more than 11 million people.  With total assets of more than $1 trillion, it’s important to make certain that, should the owner die, the IRA doesn’t lose its value upon transfer to a new owner.

Advisors warn that many IRA owners mistakenly believe because they have a will, the person(s) they list as their heir(s) will automatically receive the IRA to use as a savings tool or turn into cash in whatever manner they wish.  Yet, without a specific and up-to-date IRA beneficiary designation form for each IRA, the beneficiary may be forced to empty the account right away risking taxes and penalties; and may even be bumped into a higher income tax bracket.   Some states require the accounts to go through probate court when there is no beneficiary form.

IRA owners should fill out what is a very simple beneficiary form separate from their will.  That way, when the owner dies, the designated beneficiary is able to determine the best distribution strategy over his or her lifetime.  A new beneficiary form is needed any time an IRA account is changed or updated, or the account is moved to a new custodian.

Typically, IRA beneficiaries must take distributions during their lifetime.  Inherited traditional IRAs require taxes to be paid on distributions.  Rollover, SEP, and SIMPLE IRAs are treated the same way. Beneficiaries are not required to pay taxes on distributions from an inherited Roth IRA.

Generally, surviving spouses have several choices including even disclaiming up to 100% of the IRA assets, which, besides avoiding extra taxable income, enables their children to inherit the IRA assets.  But, if the spouse decides to take a lump sum distribution, or begins distributions on a traditional IRA, taxes must be paid.

Non-spouse beneficiaries have fewer choices.  Among them, including taking the lump sum amount and paying a large share in federal taxes; disclaiming all or part of the assets for up to 9 months after the previous owner’s death; or begin taking taxable distributions from the account.

If you inherit an IRA, you cannot roll it over into your own IRA. You must also make certain it is re-titled as an inherited IRA.  If you move the IRA to a new custodian, make certain it is made as a “trustee-to-trustee” transfer or it will be considered as a taxable total distribution, thereby, ending the account as an IRA.  There are deadlines for your actions and you can even face the dreaded 50% penalty if you don’t make a required withdrawal in time.

To ensure you leave as much of your IRA asset as possible to whom you choose, or if you inherit an IRA, consult your financial advisor for the best steps to take to lessen the taxes and maximize the advantages of these retirement accounts.

If you have any questions about your financial savings plans, beneficiaries and the tax consequences of your choices, please contact us at McRuer CPAs.

04/14/2013

Last Minute Tax Saving Tips

Time running out graphic

With just a day remaining until the 2012 income tax filing deadline, there are still a few tax-cutting moves you may be able to make on or before April 15th.

Contribute to a traditional or Roth IRA. You may contribute up to $5,000, or, if you are 50 or older, up to $6,000.  Income limits apply.

Remember that traditional IRA contributions are often tax-deductible, but withdrawals are taxable.  Roth account contributions aren't deductible, but qualified withdrawals are tax-free and have other benefits for retirees.  For example, the Roth withdrawals don't raise Medicare premiums or taxes on Social Security benefits, nor do they help trigger the new 3.8% Medicare tax on other investment income.

Contribute to a SEP IRA or other tax-favored pension plan. Taxpayers with filing extensions can make deductible payments to these plans through October 15th. 

Contribute to a Health Savings Account. Taxpayers who already set up an HSA by the end of 2012 have through April 15th to make deductible payments if the accounts are linked to an approved high-deductible health plan.  They may contribute up to $6,250 per family or $3,100 for individuals.

If you have any questions, contact us at McRuer CPAs.

02/22/2013

Roth Tax Reminder

Tax docs in brownIf in 2010 you conducted a Roth IRA conversion and opted to split recognizing the income between 2011 and 2012, remember you may still need to report half of the resulting taxable income on your 2012 return.

A special 2010 conversion rule allowed taxpayers who opted to convert a Roth IRA in that year to split the amount of reportable taxable income from the conversion between a 2011 and 2012 tax return.

Because the conversion was two years ago, you may need to be reminded that you have the remaining half of the taxable income to report on your 2012 return.  This does not apply to taxpayers who already reported the total amount on their 2011 return.

This reminder applies to Roth conversions in 2010 from traditional IRAs and conversions from workplace retirement plans, including in-plan rollovers to designated Roth accounts.

The IRS provides worksheets and examples in Publication 590 for Roth IRA conversions and Publication 575 on reporting pension and annuity income for conversions to designated Roth accounts. 

Finally, taxpayers who made Roth conversions in 2012, or are planning to do so in 2013 or later years, must report the conversion using Form 8606

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