Roth IRA Contribution

This information is an excerpt from the 2014-2015 IRA and Individual Retirement Federal Tax Update course by Vern Hoven:

ROTH IRA PROVISIONS §408A

Roth IRAs

Contribution amount is $5,500. Individuals with AGI below certain levels may make nondeductible contributions to a Roth IRA. The maximum annual contribution that may be made to a Roth IRA is the lesser of $5,500 or the individual’s compensation for the year. The contribution limit is reduced to the extent an individual makes contributions to any other IRA for the same taxable year. As under the rules relating to IRAs generally, a contribution of up to $5,500 for each spouse may be made to a Roth IRA provided the
combined compensation of the spouses is at least equal to the contributed amount.

Income limitation for annual contributions (2014 Pension Plan Limitation, IR 2013-86). The maximum annual Roth IRA contribution is phased out as an individual’s AGI exceeds certain limits:

Year

2013

2014

2015

Single

$112,000 – $127,000

$114,000 – $129,000

$116,000 – $131,000

Married filing joint

$178,000 – $188,000

$181,000 – $191,000

$183,000 – $193,000

Married filing separate

$0 – $10,000

$0 – $10,000

$0 – $10,000

Distributions (§408A(d)). “Qualified distributions” of designated Roth contributions are excludable from gross income. A qualified distribution is one that occurs at least five years after the year of the participant’s first designated Roth contribution (counting such first year as part of the five) and is:

1. made on or after attainment of age 59½,
2. made on account of the participant’s disability,
3. made to a beneficiary or estate on or after the participant’s death, or
4. made for qualified first-time homebuyer expenses up to $10,000.

This information and more can be found in the 2014-2015 IRA and Individual Retirement Federal Tax Update.

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Same Sex Marriage Tax Law Changes

In the 2014-2015 Individual and Employee Federal Tax Update, Vern Hoven discusses the changes in same-sex marriage laws for the year 2013 and forward. Changes include legally married same sex couples in both a same sex marriage recognized state and those living outside of a marriage recognition state.

Legal Same-Sex Marriages Are Recognized for Federal Tax Purposes 

(Rev. Rul. 2013-17)

Joint or married separate filing required for years beginning in 2013. Legally married same sex couples are treated as married for all Federal tax purposes, including income, gift and estate taxes. Starting in 2013, legally-married same-sex couples generally must file their Federal income tax returns using either the “married filing jointly” or “married filing separately” filing status. For legally married couples living outside of a marriage recognition state, generally, the couple will use a married filing status for Federal purposes but their state may require that they continue to file as “single” or “head of household.”

Prior years. Under the terms of Rev. Rul. 2013-17 individuals who were in same-sex marriages may, but are not required to, file amended returns choosing to be treated as married for Federal tax purposes for one or more prior tax years still open under the statute of limitations.

Receive this information and more tax law updates in the 2014-2015 Individual and Employee Federal Tax Update.

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The 2014-2015 Federal Tax Updates Are Here!

The holidays are not the only thing quickly approaching! Tax season will be here before you know it; ensure you are prepared for those tricky tax changes with the 2014-2015 Federal Tax Updates! Offered in both Live Webcast and Self-Study versions, receive detailed and informative information you need-to-know from expert Vern Hoven.

Register for the Live Webcasts offered in November, December, and January and receive 16 hours of CPE test free, as well as gain access to Instructor Vern Hoven LIVE to ask questions.

2014-2015 Federal Tax Update: Part 1 (4 CPE hours)

  • Part 1 of this series focuses on changes to Individual Income Tax.

2014-2015 Federal Tax Update: Part 2 (4 CPE hours)

  • Part 2 takes a look at Real Estate Tax, Passive Loss, Individual Retirement Plan and Estate/Gift Taxation.

2014-2015 Federal Tax Update: Part 3 (4 CPE hours)

  • Part 3 of the series covers business tax changes and business retirement plans.

2014-2015 Federal Tax Update: Part 4 (4 CPE hours)

  • Part 4 takes a look at Federal Payroll changes, Corporate Tax changes, Partnership changes,and IRS Audit issues.

 

The 2014-2015 Federal Tax Updates are also available in Self-Study format, allowing you the ease of completing these courses on your own time and now on your iPad or Android Tablet. Gain instant access to video courses and bonus manuals and materials provided by Vern Hoven.

2014-2015 IRA & Individual Retirement Federal Tax Update (3 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rulings affecting IRA and individual retirement plans.

2014-2015 Real Estate & Investment Federal Tax Update (5 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting real estate taxation.

2014-2015 Estates, Trusts & Beneficiaries Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting gift, estate and trust taxation.

2014-2015 Schedule C/F & General Business Federal Tax Update (9 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting business taxation.

2014-2015 Business Pension Plan & Issues Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting pension and IRA contributions and distributions.

2014-2015 Payroll & Self-Employment Tax Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting payroll and self-employment taxation.

2014-2015 C & S Corporate Federal Tax Update (3 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting corporate taxation.

2014-2015 Limited Liability Company (LLC) & Partnership Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting partnership and LLC taxation.

2014-2015 IRS Practice & Procedures Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current cases and rules affecting the tax preparer’s relationship with the IRS.

2014-2015 Individual & Employee Federal Tax Update (9 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rulings affecting individual taxation.

Find all the information you need to register at cpelink.com or contact Customer Service and one of our knowledgeable Customer Service Representatives will be happy to assist you.

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Goodbye 2013 Returns, Hello 2014 Returns!

As the filing time for 2013 returns enters its final phase, the reality of the 2015 filing season hits! A few developments from the IRS and the courts bring new compliance measures and due diligence reminders. The fall quarterly update (offered both September 17 and October 24) will include the following:

  • When payee statements can use a truncated TIN.
  • How the Individual Shared Responsibility Payment (§5000A) and Premium Tax Credit (§36B), will factor in on the 2014 Form 1040.
  • Knowing when payments between ex-spouses or soon to be ex-spouses counts as alimony.
  • Elections and accounting method changes in store per the final regulations on dispositions of tangible depreciable property.
  • A recent IRS ruling on LLC members and self-employment tax.
  • Reminders on business deductions.

This post was written by CPE Link Instructor Annette Nellen for her upcoming Live Webcasts on September 17 and October 24, Fall Quarterly Tax Update.

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Best for Spouses to Have a Meeting of the Minds Before Filing

Keeping up to date with the tax law is more than waiting for actual law changes. The numerous court cases issued each week often include reminders about due diligence, reminders for clients, and planning considerations. Of course, some of the court cases, such as regular Tax Court decisions, have new interpretations of the law. One recent case includes a reminder about the need for spouses to coordinate filing to optimize the combined tax result.

In Bruce, TC Summary Opinion 2014-46 (5/12/14), husband (H) and wife (W) were married in 2008. They had two children (including a child of W from a prior relationship). H worked for the Navy and sometimes worked away from home. In 2009, the couple mostly lived in Navy housing. W moved out in 2010, as did H and they sometimes lived with one of their parents. Divorce proceedings began in early 2010 and were complete in February 2011. H moved out of home where he lived with W in December 2010. H e-filed their MFJ 2010 return in February 2011 and told W he’d split the $4,581 refund with her. W provided H with her bank account information. W also told H she would talk to a friend of hers who did tax work. Before 4/15/11, W filed a return as head-of-household, claiming the children as dependents. H did not know.

The IRS sent a deficiency notice to H changing his filing status to MFS and denying him the child credit, dependency exemption and EITC. The Tax Court agreed with IRS. Per §1.6013-1(a)(1), it is permissible to change from joint to separate filing status if done before the due date of the return. W filed her HH return in March 2011.

The court held that W was entitled to the dependency exemptions because the children lived longer with her because H moved out in December 2010. The court also noted that the time H was away for military service does not affect this residency test. Once it was determined that W was entitled to claim the children, H did not qualify for the child credit, dependency exemption or EITC. The court did not uphold accuracy-related penalties against him though because it seemed reasonable for H to assume W was fine with the MFJ return and W even gave H her bank account information so he could give half of the refund to her.

Lesson learned – Most likely, the couple would have had a combined benefit from joint filing status… Joint income was low enough to qualify for the EITC. Also, since it does not appear that H lived out of the home for the last six months of 2010, W should have filed as MFS, not as HH (see IRC 7703(b)). With both H and W using MFS, no one can claim the EITC. Of course, divorcing spouses have additional factors to consider and to avoid joint liability, separate filing is sometimes warranted.

This and other updates of summer will be covered in the Quarterly Tax Update scheduled for August 26.

This post was written by CPE Link Instructor Annette Nellen for her upcoming Live Webcast on August 26, 2014 , Summer Quarterly Tax Update.

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Important IRA and 401(k) Developments

In the past few months there have been a few interesting and important tax developments involving IRA and 401(k) distributions.

A regular Tax Court decision at the end of 2013 involved a wife forging her husband’s signature to withdraw about $37,000 from his IRA account. She used the funds for her personal benefit. Husband did not learn about it until the next year when he received the 1099-R – too late to roll it over. The court found that he was not the distributee as he received no direct or indirect benefit from the withdrawal. The court also excused him from the early distribution penalty. [Roberts, 141 TC No. 19 (12/30/13)]

Another IRA distribution case exposed an error in IRS Publication 590. The Tax Court held that an individual may have only one nontaxable rollover per year regardless of how many IRAs they have. [Bobrow, TC Memo 2014-21] The IRS subsequently issued Announcement 2014-15 providing relief, but only through 2014. The case also presents reminders of the value of an IRS publication in answering tax questions (not much) and whether status as a tax attorney is enough to waive a penalty for reasonable cause (no).

And a decision in late April involving a 401(k) distribution and divorce serves as a reminder that source of funds often matter for tax purposes. As part of a Qualified Domestic Relations Order (QDRO), wife was named an alternative payee of her husband’s 401(k) plan. Husband owed money to the wife and the 401(k) was used to repay her. Wife did not report the distribution on her return (for which she did receive a 1099-R) because it was money husband owed her. No surprise with the court’s conclusion – it’s taxable. Even with application of §1041, husband had no basis in the 401(k) funds and the debt owed to wife did not create any. [Weaver-Adams, TC Memo 2014-73]

Lesson learned – source of funds does matter. Husband should have taken the distribution and used the funds to repay his wife. Wife tried to get the understatement penalty waived saying she relied on her tax professional, that did not work. That also leaves a lesson for tax professionals. Remind clients that 1099s are also reported to the IRS and when they show them to you, you may want to make a copy for your file if you don’t already do so.

These and other tax updates of the past few months will be covered in the spring quarterly update on May 13 (repeated on June 4).

This post was written by CPE Link Instructor Annette Nellen for her upcoming Live Webcast on May 13, Spring Quarterly Tax Update.

 

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Real Estate Professionals – Section 469(c)(7) – Getting it right

This article is written by CPE Link instructor Annette Nellen as a follow up to her Live Webcast Passive Loss Rules and Real Estate Professionals.

We continue to see cases involving Code §469(c)(7) on real estate professionals.  One commonality is that the taxpayers lose because they clearly do not meet the definition of a real estate professional, often because they have full-time employment outside of the real estate industry and have few rental properties.  A recent case involved a couple with three rental properties located out of state. This case has lessons both for taxpayers and their preparers.

Ballesteros, TC Summary Opinion 2013-108, involved a working couple. The wife (W) was a full-time nurse and the husband (H) was a full-time employee of an aerospace company. The couple lived in California and owned three rental properties in Georgia and Florida. They deducted approximately $12,000 loss per year for these grouped properties. They had logs showing time spent for phone calls, paying bills, going to the Post Office, and social events. Most tasks were reported in block of 2 or 4 hours.  The hours reported were as follows:

Wife

Husband

2008

2,199

901

2009

3,025

1,005

2010

2,248

851

 

W indicated that both she and her husband were real estate professionals. The IRS and court questioned the logs and time spent. Per the court:

“We need not accept petitioner’s testimony and may and do reject it because of the many indicia of unreliability. … Petitioner’s logs are unreliable because the hours she recorded for specific tasks, such as telephone calls and writing and mailing checks, were improbable in that they were excessive, apparently duplicative (charging the same hours to each rental property), and always the same. The total hours recorded are unrealistic in view of petitioners’ full-time employment.”

The court upheld a substantial understatement of tax penalty. Per the court, “exaggerated logs negate the good faith” of H and W. W stated that their return preparer provided a checklist of questions which confirmed that she was a real estate professional. The preparer did not testify, but the court noted that the preparer likely only had erroneous information from the couple.

Tax Season Relevance:

If an individual has a full-time job outside of real property trades or businesses, they are unlikely to be a real estate professional.  A full-time job is likely 2,080 hours per year (perhaps more). So, to be a real estate professional, the person would have to work more than 2,080 hours in real property trades or businesses.  If the person only has rental properties (not a real estate broker or developer, for example), they would need many rental properties to possibly be spending over 40 hours per week on all of them.

If a person’s answer to the question – what is your profession, is something outside of real property trade or businesses, they likely are not a real estate profession. One of the actions IRS examiners are to take in auditing a §469(c)(7) issue is to look at the occupation noted on the signature line of the taxpayer’s return to see if it indicates a real estate profession (IRS audit guide page 2.5).

Ask questions of clients with rental properties who tell you they are real estate professionals – what is there profession, how many rental properties do they have, do they have legitimate logs noting realistic time spent on the rentals?  Share the Ballesteros case (or other similar cases) with them, highlighting the penalty imposed upon the taxpayer.

 

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Affordable Care Act (ACA): Supreme Court Rules Health Care Bill Constitutional. Penalty for No Insurance Is Really a “Tax!”

On June 28, 2012, the Supreme Court, in a five to four decision, held the insurance mandate and, thus, the Affordable Care Act (ACA) to be constitutional. Although political rhetoric continues, this Supreme Court decision means that we must prepare for what the Treasury Inspector General calls the biggest tax act in 20 years. What does ACA mean to you and your clients?

Health Care Reform Impacts Most Businesses and Individuals
The Affordable Care Act (P.L. 111-148), signed by the President on March 23, 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) and signed by the President on March 30, 2010, implements fundamental health care reforms and requires many of the 32 million uninsured individuals to obtain health care coverage or pay penalties. Most lower-income individuals, along with some middle-class families, will receive government help to pay for health insurance purchased at state Exchanges.

ACA contains more than $400 billion in new taxes and revenue raisers on employers and individuals. Major changes you and your clients can expect include:

  1. Individuals without health insurance will owe a penalty (tax) starting in 2014;
  2. Employers with 50 or more full-time employees must offer affordable health insurance to their employees beginning in 2015 or pay a penalty;
  3. State insurance exchanges will be established to allow clients to shop for insurance;
  4. Employee Medicare tax increases by 0.9% (total of 2.35%) on annual wages for married couples with an AGI over $250,000 and singles with an AGI over $200,000 starting in 2013;
  5. A new Medicare tax of 3.8% applies on net investment income for married couples with AGI over $250,000 and singles with AGI over $200,000 starting in 2013;
  6. Extensive new penalties apply on tax shelters;
  7. The “haircut” to deduct medical expenses increases from 7.5% to 10% of AGI starting in 2013;
  8. FSA contributions for medical expenses are limited starting in 2013 to $2,500. and
  9. Children under age 27 may be insured under their parent’s health insurance policy.

This article is an excerpt from Vern Hoven’s Federal Tax Updates Series. 

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Test Your Tax Treatment Knowledge

Tax Treatment of Individual Retirement Arrangements
Q: Helen, age 60, made total contributions of $60,000 to a Roth IRA she established 15 years ago. Five years ago she withdrew $10,000 tax-free. How much income must she recognize if she takes a complete distribution from the Roth IRA this year when its value is $90,000?

A. $0
B. $30,000
C. $40,000
D. $90,000

A: The correct answer is C Except in the case of a spousal IRA, a taxpayer may not contribute an amount to an IRA in excess of his or her earned income for the year. For purposes of the IRA rules, earned income includes salary, fees, tips, bonuses, commissions, and alimony. Since the taxpayer’s earned income, including alimony, exceeds the maximum IRA contribution, she may make a contribution not exceeding $5,500.

Tax Treatment of Life Insurance Proceeds
Q: Bob has owned his participating life insurance policy for many years and receives substantial policy dividends each year that he takes in cash. What tax treatment would be given to the dividend he receives  this year, if his total policy premiums were $10,000 and his total dividends were $12,000?

A. The dividend would be tax-free as a return of premium
B. The dividend would be taxable at capital gains rates
C. The dividend would be considered ordinary income
D. Taxation of the dividend would be deferred until policy surrender

A: The correct answer is C. Bob’s dividend this year would be considered ordinary income. Dividends received under a life insurance policy are generally income tax-free until the total amount received or credited exceeds the aggregate premiums paid for the policy. Any dividends paid or credited in excess of the total gross premiums paid for the life insurance policy are considered taxable income in the year in which received.

Tax Treatment of Sickness & Injury Plans
Q: An Archer MSA rollover may be made no more frequently than once every _____ months.

A. 6
B. 12
C. 18
D. 24

A: The correct answer is B. An Archer MSA rollover may not be made more frequently than every 12 months. The applicable rollover rules are much like those that apply to IRA rollovers and rollovers from qualified plans. Accordingly, an Archer MSA rollover must follow the rules below:

  • The rollover must be made within 60 days of the individual’s receipt of the Archer MSA distribution; and
  • Only one MSA rollover may be made each year. (The “year” in the case of an Archer MSA rollover is a rolling 12-month period, rather than a calendar or tax year.)

Q: For which of the following individuals would qualified long term care insurance premiums NOT be deductible without reference to adjusted gross income?

A. A partner in a law firm
B. An owner of an S corporation
C. A sole owner of a regular corporation
D. An owner of a limited liability company

A: The correct answer is C. An owner of a regular corporation is not considered self-employed for purposes of long term care insurance premium deductibility. A self-employed person, for purposes of long term care insurance premium tax-deductibility, includes sole proprietors, partners, and owners of S corporations, limited liability partnerships and limited liability companies. Thus, a sole owner of a regular corporation could not deduct premiums for qualified long term care insurance premiums without reference to his or her adjusted gross income.

These questions were pulled from Paul Winn’s Tax Treatment of Health Plans, IRAs, and Life Insurance Proceeds courses.

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Federal Tax Updates are here!

Part 1: Individual Income Tax
Learn about new tax legislation passed in 2013, extender bill provisions, the individual mandate for health coverage and associated penalties, individual tax credits, including the AMT patch which has been made permanent, the new tax return filing requirements for same-sex couples and Registered Domestic Partners after the Supreme Court’s decision on DOMA and much more…

Topics Covered:

  • The new tax legislation passed in 2013
  • The extender bill provisions
  • The top tax bracket — it’s back to 39.6% starting this year
  • The new tax return filing requirements for same-sex couples and Registered Domestic Partners after the Supreme Court’s decision on DOMA
  • The myriad of adjustments to gross income such as health savings accounts and prepaid tuition accounts
  • The ways divorce attorneys can screw up the alimony requirements
  • The return of the personal exemption phaseout and itemized deduction phaseout haircuts
  • The retention of the 0% and 15% capital gain rates and the introduction of the 20% capital gain rates on high income taxpayers
  • The stock basis reporting on the new Form 1099-B and the redesigned Form 8949
  • How to avoid the 3.8% Medicare tax on unearned income
  • The new FBAR and FATCA reporting forms and requirements for both foreign income and foreign assets
  • The increase of the medical AGI haircut from 7.5% to 10%
  • The individual mandate for health coverage and associated penalties
  • Which individuals are exempt from the individual mandate
  • The itemized deductions including the charitable contribution rules, the home mortgage rules, and allowable medical expenses
  • Which form to use for Ponzi-type losses
  • The general rules on both casualty losses and theft losses
  • The individual tax credits, including the AMT patch which has been made permanent
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