Before you start tapping into your retirement savings, you may want to read this first:
If you are under age 59½ and plan to withdraw money from a qualified retirement account, you will likely pay both income tax and a 10% early-distribution tax on any previously un-taxed money that you take out. Withdrawals you make from a SIMPLE IRA before age 59½ and those you make during the 2-year rollover restriction period after establishing the SIMPLE IRA may be subject to a 25% additional early-distribution tax instead of the normal 10%. The 2-year period is measured from the first day that contributions are deposited. These penalties are just what you’d pay on your federal return; your state may also charge an early-withdrawal penalty in addition to the regular state income tax.
The following exceptions may help you avoid the penalty:
- Withdrawals from any retirement plan to pay medical expenses—Amounts withdrawn to pay unreimbursed medical expenses are exempt from penalty if they would be deductible on Schedule A during the year and if they exceed 10% of your adjusted gross income. This is true even if you do not
- IRA withdrawals annuitized over your lifetime—To qualify, the withdrawals must continue unchanged for a minimum of 5 years, including after you reach age 59½.
- Employer retirement plan withdrawals—To qualify, you must be separated from service and be age 55 or older in that year (the lower limit is age 50 for qualified public-service employees such as police officers and firefighters) or elect to receive the money in substantially equal periodic payments after your separation from service.
- Withdrawals from any retirement plan as a result of a disability—You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activities because of a physical or mental condition. A physician must certify your condition.
- IRA withdrawals by unemployed individuals to pay medical insurance premiums—The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You also must have received unemployment compensation for at least 12 weeks during the year.
- IRA withdrawals to pay higher education expenses—Withdrawals made during the year for qualified higher education expenses for yourself, your spouse, or your children or grandchildren are exempt from the early-withdrawal penalty.
- IRA withdrawals to buy, build, or rebuild a first home—Generally, you are considered a first-time homebuyer for this exception if you had no present interest in a main home during the 2-year period leading up to the date the home was acquired, and the distribution must be used to buy, build, or rebuild that home. If you are married, your spouse must also meet this no-ownership requirement. This exception applies only to the first $10,000 of withdrawals used for this purpose. If married, you and your spouse can each withdraw up to $10,000 penalty-free from your respective IRA accounts.
You should be aware that the information provided above is an overview of the penalty exceptions and that conditions other than those listed above may need to be met before qualifying for a particular exception. You are encouraged to contact this office before tapping your retirement funds for uses other than retirement. Distributions are most often subject to both normal taxes and other penalties, which can take a significant bite out of the distribution. However, with carefully planned distributions, both the taxes and the penalties can be minimized. Please call Dagley & Co. for assistance.
With 2017 just around the corner, it is time to think about actions you can take to improve your tax situation from 2016. In our opinion, this is something you probably want to get out of the way before the holiday season arrives. Dagley & Co. is always here to help in anyway possible in terms of your tax situations for both present and upcoming years.
There are many steps that you can take before January 1 to save a considerable amount of tax. Here are a few that we gathered:
Maximize Education Tax Credits – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses in 2016. If it is not the maximum allowed for computing the credits, you can prepay 2017 tuition as long as it is for an academic period beginning in the first three months of 2017. That will allow you to increase the credit for 2016. This technique is especially helpful when a student has just started college in the fall.
Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting some or all of your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount.
Don’t Forget Your Minimum Required Distribution – If you are over 70.5 years of age and have not taken your 2016 required minimum distribution from your IRA or qualified retirement plan, you should do that before December 31 to avoid possible penalties. If you turned 70.5 this year, you may delay your 2016 distribution until the first quarter of 2017, but that will mean a double distribution in 2017 that will be taxed.
Advance Charitable Deductions – If you regularly tithe at a house of worship or make pledges to other qualified charities, you might consider pre-paying part or all of your 2017 tithing or pledge, thus advancing the deduction into 2016. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next. If you are age 70.5 or over, you can also take advantage of a direct IRA-to-charity transfer, which will count toward your RMD and may even reduce the taxes on your Social Security income.
Maximize Health Savings Account Contributions – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions earlier in the year. This opportunity applies even if you first become eligible in December.
Prepay Taxes – Both state income and property taxes are deductible if you itemize your deductions and you are not subject to the AMT. Prepaying them advances the deductions onto your 2016 return. So if you expect to owe state income tax, it may be appropriate to increase your state withholding tax at your place of employment or make an estimated tax payment before the close of 2016, and if you are paying your real property taxes in installments, pay the next installment before year-end.
Pay Tax-deductible Medical Expenses – If you have outstanding medical or dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 10% of AGI floor for deducting medical expenses, or if adding the payments would put you over the 10% threshold. You can even use a credit card to pay the expenses, but if you won’t be paying off the full balance on the card right away, do so only if the interest expense on the credit card is less than the tax savings. You might also wish to consider scheduling and paying for medical expenses such as glasses, dental work, etc., before the end of the year. See the “Seniors Beware” article if you or your spouse is age 65 and over.
Take Advantage of the Annual Gift Tax Exemption – You can give $14,000 to each of an unlimited number of individuals without paying gift tax each year, but you can’t carry over unused amounts from one year to the next. (The gifts are not tax deductible.)
Avoid Underpayment Penalties – If you are going to owe taxes for 2016, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters.
There are many different factors that go into each of the steps above. We encourage all of our clients to contact Dagley & Co. prior to acting on any of the advice to ensure that you will benefit given your specific tax circumstances. Our phone number is: (202) 417-6640 and email: firstname.lastname@example.org.
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Do you need a mid-year tax checkup? What major has happened to you lately? If you are inclined to procrastinate until the end of the year or, even worse, until tax-filing season to worry about your taxes, you may be missing out on opportunities to reduce your tax and avoid certain penalties. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them.
->Did you get married, get divorced, or become widowed?
->Did you change jobs or has your spouse started working?
->Did you have a substantial increase or decrease in income?
->Did you have a substantial gain from the sale of stocks or bonds?
->Did you buy or sell a rental?
->Did you start, acquire, or sell a business?
->Did you buy or sell a home?
->Did you retire this year?
->Are you on track to withdraw the required amount from your IRA (age 70.5 or older)?
->Are you taking advantage of the IRA-to-charity transfers (age 70.5 or older)?
->Did you refinance your home or take out a second home mortgage this year?
->Were you the beneficiary of an inheritance this year?
->Did you welcome a new child into your family? Time to consider a tax-advantaged savings plan!
->Are you taking advantage of tax-advantaged retirement savings?
->Have you made any significant equipment purchases for your business?
->Are you planning to purchase a new business vehicle and dispose of the old one? It makes a significant difference whether you sell or trade in the old vehicle.
->Are your cash and non-cash charitable contributions adequately documented?
->Did you, or are you planning to, make energy-efficiency improvements to your main home or install a solar system for your main or second home this year?
->Are you paying college tuition for yourself, your spouse or dependent(s)?
->Are you keeping up with your estimated tax payments or do they need adjusting?
->Did you purchase your health insurance through a government insurance marketplace and qualify for an insurance premium subsidy? If your income subsequently increased, you may need to be prepared to repay some portion of the subsidy.
->Do you have substantial investment income or gains from the sale of investment assets? If so, you may be hit with the 3.8% surtax on net investment income and need to adjust your advance tax payments.
->Did you make any unplanned withdrawals from an IRA or pension plan?
->Have you stayed abreast of every new tax law change?
If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to schedule a mid-year tax checkup and consult with Dagley & Co.—preferably before any of the events listed, and definitely before the end of the year.
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If a U.S. citizen and resident has a financial interest or authority over any foreign financial accounts, they are required to report. These may include bank, securities, or other types of financial accounts in a foreign country, and they are required to report that relationship if the aggregate value of the accounts exceeds $10,000 at any time during the year.
The reporting is accomplished by filing FinCEN Form 114, frequently referred to as the foreign bank account report (FBAR) on or before June 30 of the succeeding year. Thus, for the 2015 tax year the FBAR must be filed by June 30, 2016. The filing is done electronically on the Financial Crimes Enforcement website. For the 2015 tax year, there are no extensions and civil penalties for non-willful violations, which can be as high as $10,000. The penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation.
A “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, or other accounts at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included. It becomes a “foreign financial account” if the financial institution is located in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks and is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account, and the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account.
You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county who have put you on their bank account in case something happens to them. If the value of the account exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR-reporting requirement.
You may also have an additional requirement to file Form 8938, which is similar to the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married and filing jointly with your spouse, you must file Form 8938 if the value of certain financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high $50,000. Form 8938 should be filed with your individual tax return for the year by the due date (including extensions) of that return. If you have already filed your 2015 tax return and believe you may have an 8938 filing requirement that wasn’t met on the return you filed, you should call Dagley & Co. immediately.
As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions, and reporting can be complicated. The foregoing is an overview of the reporting requirements. Please call Dagley & Co. for additional details that may apply to your particular situation. Please call well in advance of the June 30 date if you need assistance in meeting your FBAR reporting obligation. Remember, there are no extensions for the FinCEN 114 filing.
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The Treasury Department has been aggressively pursuing U.S. taxpayers with offshore accounts through international banking channels as well as through its FinCEN (Financial Crimes Enforcement Network).
Some years ago, which started this, the Senate hearings revealed that many Americans were hiding millions of dollars in Swiss and other foreign banks, not reporting the income from these accounts, and not complying with foreign bank account reporting (FBAR) rules that require every U.S. citizen and resident who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, to report that relationship if the aggregate value of the accounts exceeds $10,000 at any time during the year.
New laws were enacted that allowed FinCEN to begin forcing foreign banks and financial institutions to reveal the names of Americans with accounts.
Although FBAR reporting was legally required as far back as 1970, few Americans knew about it or took it seriously. This has changed in the last few years because of FinCEN’s aggressive search for violators and the draconian penalties that apply to scofflaws. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. Willful violators are also subject to criminal prosecution, which can result in fines up to $250,000 and jail time up to five years! CAUTION: Schedule B of the Form 1040 tax return asks if you have a financial interest in or signature authority over a financial account located in a foreign country. If you answer YES but don’t file the FBAR, the IRS may consider your failure to file “willful,” which means it can impose the larger fines and jail time penalties.
Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, or other accounts at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included. It becomes a “foreign financial account” if the financial institution is located in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account, and the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account.
You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank account in case something happens to them. If the value of the account exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.
FBAR reporting is accomplished by filing FinCEN Form 114 on or before June 30 of the following year, and there are currently no extensions. However, beginning for returns due in 2017, the due date changes to April 15 and a 6-month extension will be available.
You may also have an additional requirement to file Form 8938, which is similar to the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married filing jointly, you must file Form 8938 if the value of certain financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high $50,000.
As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions. Please call Dagley & Co. with questions or if you need assistance in meeting your foreign account reporting obligations.
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Times are changing for business owners: Beginning 2015, large employers (with 100 or more full-time equivalent employees) must begin offering health insurance coverage to their employees. Then, in 2016, employers with 50 or more equivalent full-time employees must do the same or face penalties, called the “large employer health coverage excise tax.”
Employers with fewer than 50 full-time equivalent employees are never required to offer their employees an insurance plan, but qualified small employers who do provide coverage may qualify for the small business health insurance credit.
In the past, many smaller employers have simply reimbursed their employees for the cost of insurance. They found it less expensive and had fewer administrative costs than having a group insurance plan. However, under the Affordable Care Act (ACA, or Obamacare for short), a group health plan that reimburses employees for the employees’ substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However, most commentators believe an employer payment plan will fail to comply with the ACA annual dollar limit prohibition because an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement. Thus, reimbursement plans may be subject to a very draconian penalty.
In February, the IRS issued Notice 2015-17, which provides small employers limited relief from the stiff $100 per day, per participant, penalties under IRC §4980D for health insurance reimbursement plans that had been addressed in Notice 2013-54. In particular, that notice provided:
- Transitional relief for employers that do not meet the definition of large employers (i.e., employers with 50 or more employees). This relief is granted for all of 2014 and for January 1 through June 30, 2015; and
- Relief for S corporations that pay for or reimburse premiums for individual health insurance coverage for 2% shareholders, as previously addressed in Notice 2008-1. The relief period is indefinite, and the IRS states that taxpayers may continue to rely on Notice 2008-1 “unless and until additional guidance” is provided.
June 30, 2015 has come and gone – and so has the small employer relief. This means employers who still reimburse employees for their medical expenses are in danger of being subject to the $100 per day ($36,500 a year) per employee penalty. Compared to the annual $2,000 penalty that large employers face for not providing insurance to their full-time employees, the penalties on small employers are substantial enough to bankrupt them. So, the large employer who fails to provide any insurance pays a penalty of only $2,000 per year per employee while the employer who helps employees by reimbursing them for the cost of insurance gets hit with an up to $36,500-per-employee penalty.
This is true even if the employer is a small employer (50 or fewer equivalent full-time employees) who is under no legal obligation to provide health insurance plans for its employees, but makes reimbursements simply to help the employees. Does this seem fair? We will let you form your own opinion.
Will Congress step in to alleviate the problem? Maybe yes and maybe no, and employers must decide if it is worth the risk to depend on Congress to act. One firm, Zane Benefits, claims to have solved the problem with a reimbursement plan that complies with the code, while others argue that it does not.
We hope this illustrates the importance of you understanding your risks if your business has a medical reimbursement plan and perhaps consider other options. Please get in touch with Dagley & Co. if you have questions.
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