• Consequences of Filing Married Separate

    27 March 2017
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    Married? Thinking about NOT filing a joint return with your spouse? Most likely, you will utilize the ‘married filing separate’, or MFS, filing status. With this, you must be aware that there are special tax codes involved that married individuals CANNOT benefit by filing as MFS. Dagley & Co. describes some of the most frequent issues we’ve encountered  when making the choice of the MFS filing status. (Please note, all dollar amounts are those for 2017)

    Joint & Several Liability – When married taxpayers file joint returns, both spouses are responsible for the tax on that return. What this means is that one spouse may be held liable for all the tax due on a return, even if the other spouse earned all the income on that return. In some marriages, this becomes an issue and causes the spouses to decide to file separately. In other cases, especially second marriages, the couple may want to keep their finances separate. Unless all the income, exemptions, credits and deductions are divided equally, which usually happens in community property states, this generally causes the incomes to be distorted and could easily push one of the spouses into a higher tax bracket and create a greater combined tax than filing jointly. Being in a separate property state, where each spouse claims their own earnings, can also create an uneven allocation of income and a higher tax bracket for one of the spouses.

    Exemptions – Taxpayers are allowed a $4,050 tax exemption for each of their dependents. However, the $4,050 allowance cannot be divided between the MFS filers, so only one of the filers can claim a dependent’s exemption, and where there are multiple dependents, the spouses would need to allocate the exemptions between them.

    Itemizing Deductions – To prevent taxpayers from filing MFS and one spouse taking advantage of itemized deductions and the other utilizing the standard deduction, the tax regulations require both to itemize if one of them does.

    Social Security Income – When filing a joint return, Social Security (SS) income is not taxable until the modified AGI (MAGI) – which is regular AGI (without Social Security income) plus 50% of the couple’s Social Security income plus tax-exempt interest income and plus certain other infrequently encountered additions – exceeds a taxable threshold of $32,000. However, for married taxpayers who have lived together at any time during the year and are filing married separate, the threshold is zero, generally making more of the Social Security income taxable.

    Section 179 Deduction – Businesses can elect to expense, instead of depreciate, up to $510,000 of business purchases, generally including equipment, certain qualified leasehold property and off-the-shelf computer software. The $510,000 cap is reduced by $1 for every $1 that the qualifying purchases exceed $2,030,000 for the year. Married taxpayers are treated as one taxpayer for purposes of the Section 179 expense limit. Thus, they generally must split the limit equally unless they can agree upon and elect an unequal split.

    Special Passive Loss Allowance – Passive losses are generally losses from business and rental activities in which a taxpayer does not materially participate. Those losses are not allowed except to offset income from other passive activities. Rental property is an example of a passive activity, and for lower-income taxpayers, a special allowance permits taxpayers who are actively involved in the rental activity to currently deduct a loss of up to $25,000 if their AGI does not exceed $100,000. That $25,000 special loss allowance phases out by 50 cents for each $1 of AGI over $100,000 and is completely eliminated when the AGI reaches $150,000. When filing separately, this special allowance is not allowed unless the spouses live apart the entire year, and then the allowance is reduced to $12,500 each.

    Traditional IRA Deduction Phase-Out – If a married taxpayer filing jointly is participating in a qualified employer pension plan, the deductibility of a traditional IRA contribution is phased out ratably for an AGI between $99,000 and $119,000. If the taxpayers file married separate, the phase-out begins at $0 if the taxpayer participates in their employer’s plan, and when the AGI reaches $10,000, no traditional IRA deduction is allowed. So little, if any, IRA deduction will be available to such an MFS filer.

    Roth IRA Contribution Phase-Out – Taxpayers may choose to contribute to a non-deductible Roth IRA. However, Roth IRA contributions are ratably phased out for higher-income married filing jointly taxpayers with an AGI between $186,000 and $196,000. For a married taxpayer filing MFS status, that AGI phase-out range drops to $0 through $9,999, virtually eliminating the possibility of a Roth contribution.

    Coverdell Education Accounts – Taxpayers are allowed to contribute up to $2,000 per beneficiary to a Coverdell education savings account annually. However for joint filers, the amount that can be contributed ratably phases out for AGIs between $190,000 and $220,000. For married filing separate taxpayers, the phase-out is half that amount, from $95,000 to $110,000.

    Education Tax Credits – Taxpayers are allowed a tax credit, called the American Opportunity Tax Credit, of up to $2,500 per family member enrolled at least half-time in college for the cost of tuition and qualified expenses. This credit phases out ratably for higher-income married taxpayers filing jointly with an AGI between $160,000 and $180,000.

    There is a second higher-education credit called the Lifetime Learning Credit, which provides a credit of up to $2,000 per family. This credit also phases out ratably for higher-income married taxpayers filing jointly with an AGI between $112,000 and $132,000.

    However, neither credit is allowed for married filing separate taxpayers.

    Higher Education Interest – Taxpayers can take a deduction of up to $2,500 for student loan interest paid on higher-education loans. Like other benefits, it is phased out for higher-income married taxpayers filing jointly, in this instance when the AGI is between $135,000 and $165,000. It is not allowed at all for taxpayers filing as married separate.

    Education Exclusion For U.S. Savings Bond Interest – Although not frequently encountered, interest from certain U.S. Savings Bonds can be excluded if used to pay higher-education expenses for the taxpayers and their dependents. The exclusion phases out for married taxpayers with an AGI between $117,250 and $147,250. This deduction is not allowed at all when filing married separate.

    Premium Tax Credit – For married taxpayers who qualify for the PTC (health insurance subsidy) under Obamacare, if they file married separate, they may be required to repay the subsidy.

    Earned Income Tax Credit – This is a refundable tax credit that rewards lower-income taxpayers for working and can be as much $6,318 for families with three or more qualifying children. Taxpayers filing as married separate are not qualified for this credit.

    Child Care Credit – If both spouses work and incur child care expenses, they qualify for the child care credit. However, for those married filing separate, the credit is not allowed.

    Halved Deductions & Credits – Many of the deductions and credits allowed to a married couple filing jointly are cut in half for the married filing separate filing status. They include:

    • Standard Deduction
    • Standard Deduction Phase-Out
    • Alternative Minimum Tax Exemptions
    • Alternative Minimum Tax Exemptions Phase-Outs
    • Child Tax Credit Phase-Out

    Head of Household Filing StatusWhere a married couple is not filing jointly, one or both spouses may qualify for the more beneficial Head of Household (HH) filing status rather than having to file using the MFS status. A married individual may use the HH status if they lived apart from their spouse for at least the last six months of the year and paid more than one-half of the cost of maintaining his or her home as a principal place of abode for more than one-half the year of a child, stepchild or eligible foster child for whom the taxpayer may claim a dependency exemption. (A non-dependent child only qualifies if the custodial parent gave written consent to allow the dependency to the non-custodial parent or if the non-custodial parent has the right to claim the dependency under a pre-’85 divorce agreement.)

    As you can see, there are a significant number of issues that need to be considered when making the decision to use the married filing separate status. And these are not all of them, but only the more significant ones. The filing status decision should not be made nonchalantly, as it can have significant impact on your taxes. Please contact Dagley & Co. for assistance in making that crucial decision.

     

     

     

     

     

     

     

     

     

     

     

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  • Missed a 60-Day Rollover? There May Be Relief

    26 January 2017
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    Miss a 60-day rollover? According to the IRA, the acceptable reasons for missing include: An error was committed by the financial institution, the distribution check was misplaced and never cashed, the distribution was mistakenly deposited into an account that the taxpayer thought was an eligible retirement plan, the taxpayer’s principal residence was severely damaged, a member of the taxpayer’s family died, the taxpayer or a member of the taxpayer’s family was seriously ill, the taxpayer was incarcerated, restrictions were imposed by a foreign country, a postal error occurred, or the distribution was made on account of an IRS levy, and the proceeds of the levy have been returned to the taxpayer. If you, or someone you know, fall into any of these situations, as a taxpayer, you can take a distribution from an IRA or other qualified retirement plan and if they roll it over within 60 days they can avoid taxation on the distributed amount.

    Financial Institution Error – Where the failure to meet the deadline is due to financial institution error, the IRS provides an automatic waiver.

    Private Letter Ruling (PLR) – Where automatic waiver does not apply, and the taxpayer feels there is a legitimate reason for missing the 60-day rollover requirement, the taxpayer can request relief though a PLR where the IRS reviews the reason for missing the 60-day rollover period and either allows or denies relief from the 60-day requirement. However, the IRS will charge the taxpayer requesting the PLR a user fee of $10,000, which negates the purpose of a PLR except in cases of very large rollover amounts.

    New Self-Certification Procedure – The IRS recently announced a new certification procedure that allows a taxpayer who misses the 60-day time limit for properly rolling the amount into another retirement plan or IRA to make a written certification to a plan administrator or an IRA trustee that a contribution satisfies one of the acceptable reasons, and therefore is eligible for a waiver of the 60-day rule.

    Please remember: This provision does not apply to required minimum distributions for taxpayers who are 70.5 years of age and over.). Also, taxpayers are limited to one IRA-to-IRA rollover per year.

    The rollover must be completed as soon as practicable after the reason(s) listed above no longer prevent the taxpayer from making the contribution. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason(s) no longer prevent the taxpayer from making the contribution.

    This procedure does not apply where the IRS previously denied a waiver request for the same missed rollover.

    The IRS provides a model letter that can be used to make the self-certification. Please call Dagley & Co. if you need a copy of the letter, have questions, or need assistance related to a missed 60-day rollover.

     

     

     

     

     

     

     

     

     

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  • Time to Start Thinking About Year-End Tax Moves

    21 November 2016
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    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: info@dagleyco.com.

     

     

     

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  • Having a Low Taxable Income Year? Ways to Take Advantage of It

    17 November 2016
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    Are you having a low taxable income year? Are you unemployed, had an accident that’s kept you from earning income, incurring a net operating loss (NOL) from a business, or suffering a casualty loss? These incidents will result in abnormally low taxable income for the year. But, these can actually give rise to some interesting tax planning strategies. See below for some key elements that govern tax rates and taxable income, and some actual strategies by Dagley & Co.

    Taxable Income – First, of all, to be simplistic, taxable income is your adjusted gross income (AGI) less the sum of your personal exemptions and the greater of the standard deduction for your filing status or your itemized deductions:

    AGI                        XXXX

    Exemptions              <XXXX>

    Deductions              <XXXX>

    Taxable Income        XXXX

    If the exemptions and deductions exceed the AGI, you can end up with a negative taxable income, which means to the extent it is negative you can actually add income or reduce deductions without incurring any tax.

    Graduated Individual Tax Rates – Ordinary individual tax rates are graduated. So as the taxable income increases, so do the tax rates. Thus, the lower your taxable income, the lower your tax rate will be. Individual ordinary tax rates range from 10% to as high 39.6%. The taxable income amounts for 10% to 25% tax rates are:

    Filing Status

    (2016)

    Single Married Filing Jointly Head of Household Married Filing Separate
    10% 9,275 18,550 13,250 9,275
    15% 37,650 75,300 50,400 37,650
    25% 91,150 151,900 130,150 75,950

    For instance, if you are single, your first $9,275 of taxable income is taxed at 10%. The next $28,375 ($37,650 – $9,275) is taxed at 15% and the next $53,500 ($91,150 – $37,650) is taxed at 25%.

    Here are some strategies you can employ for your tax benefit. However, these strategies may be interdependent on one another and your particular tax circumstances.

    Take IRA Distributions – Depending upon your projected taxable income, you might consider taking an IRA distribution to add income for the year. For instance, if the projected taxable income is negative, you can actually take a withdrawal of up to the negative amount without incurring any tax. Even if projected taxable income is not negative and your normal taxable income would put you in the 25% or higher bracket, you might want to take out just enough to be taxed at the 10% or even the 15% tax rates. Of course, those are retirement dollars; consider moving them into a regular financial account set aside for your retirement. Also be aware that distributions before age 59½ are subject to a 10% early withdrawal penalty.

    Defer Deductions – When you itemize your deductions, you may claim only the deductions you actually pay during the tax year (the calendar year for most folks). If your projected taxable income is going to be negative and you are planning on itemizing your deductions, you might consider putting off some of those year-end deductible payments until after the first of the year and preserving the deductions for next year. Such payments might include house of worship tithing, year-end charitable giving, tax payments (but not those incurring late payment penalties), estimated state income tax payments, medical expenses, etc.

    Convert Traditional IRA Funds into a Roth IRA – To the extent of the negative taxable income or even just the lower tax rates, 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 with an opportunity to convert to a Roth IRA at a lower tax amount.

    Zero Capital Gains Rate – There is a zero long-term capital gains rate for those taxpayers whose regular tax brackets are 15% or less (see table above). This may allow you to sell some appreciated securities that you have owned for more than a year and pay no or very little tax on the gain.

    Business Expenses – The tax code has some very liberal provisions that allow a business to currently expense, rather than capitalize and slowly depreciate, the purchase cost of certain property. In a low-income year it may be appropriate to capitalize rather than expense these current year purchases and preserve the deprecation deduction for higher income years. This is especially true where there is a negative taxable income in the current year.

    If you have obtained your medical insurance through a government marketplace, employing any of the strategies mentioned could impact the amount of your allowable premium tax credit.

    Interested in discussing how these strategies might provide you tax benefit based upon your particular tax circumstances? Or, would like to schedule a tax planning appointment? Give Dagley & Co. a call today at (202) 417-6640.

     

     

     

     

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  • Taking Advantage of Back-Door Roth IRAs

    17 October 2016
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    Are you a high-income taxpayer? Would like to contribute to a Roth IRA but cannot because of income limitations? There is a work-around that will allow you to fund a Roth IRA.

    High-income taxpayers are limited in the annual amount they can contribute to a Roth IRA. In 2016, the allowable contribution phases out for joint-filing taxpayers with an AGI between $184,000 and $194,000 (or an AGI between $0 and $9,999 for married taxpayers filing separately). For unmarried taxpayers, the phase-out is between $117,000 and $132,000. Once the upper end of the range is reached, no contribution is allowed for the year.

    However, those AGI limitations can be circumvented by what is frequently referred to as a back-door Roth IRA. Here is how a back-door Roth IRA works:

    1. First, you contribute to a traditional IRA. For higher-income taxpayers who participate in an employer-sponsored retirement plan, a traditional IRA is allowed but is not deductible. Even if all or some portion is deductible, the contribution can be designated as not deductible.
    2. Then, since the law allows an individual to convert a traditional IRA to a Roth IRA without any income limitations, you now convert the non-deductible Traditional IRA to a Roth IRA. Since the Traditional IRA was non-deductible, the only tax related to the conversion would be on any appreciation in value of the Traditional IRA before the conversion is completed.

    Potential Pitfall – There is a potential pitfall to the back-door Roth IRA that is often overlooked by investment counselors and taxpayers alike that could result in an unexpected taxable event upon conversion. For distribution or conversion purposes, all of your IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable.

    This may or not may affect your decision to use the back-door Roth IRA method but does need to be considered prior to making the conversion.

    There is a possible, although complicated, solution. Taxpayers are allowed to roll over or make a trustee-to-trustee transfer of IRA funds into employer qualified plans if the employer’s plan permits. If the rollover or transfer to the qualified plan is permitted, such rollovers or transfers are limited to the taxable portion of the IRA account, thus leaving behind the non-taxable contributions, which can then be converted to a Roth IRA without any taxability.

    Please call Dagley & Co. if you need assistance with your Roth IRA strategies or need assistance in planning traditional-to-Roth IRA conversions.

     

     

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  • Roth IRA Aging Requirement

    31 May 2016
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    A Roth IRA can provide tax-free retirement income, but it doesn’t just happen. Before its earnings can be withdrawn tax-free, the account must be “aged.”

    Unlike traditional IRA accounts, contributions to Roth IRAs provide no tax deduction when they are made, and unlike traditional IRAs, earnings from Roths are tax-free if a distribution is what the IRS refers to as a “qualified distribution.”

    A qualified distribution is one for which: One, the account has satisfied a five-year aging rule AND meets one of the following conditions: the distribution is made after the IRA owner reaches the age of 59.5, the distribution is made after the death of the IRA owner, the distribution is made on account of the IRA owner becoming disabled, OR the distribution (up to $10,000 lifetime, or $20,000 if filing jointly and the spouse also has a Roth IRA) is for a first-time homebuyer purchasing a home.

    Figuring the five-year aging period can be tricky, and the holding period can actually be significantly less than five years. The five-year period:

    Begins on the earlier of: the first day of the individual’s tax year for which the first regular (i.e., non-rollover) contribution is made to any of the individual’s Roth IRAs, or the first day of the individual’s tax year in which the first conversion contribution is made to any of the individual’s Roth IRAs; and ends on the last day of the individual’s fifth consecutive tax year beginning with the tax year described in either (a) or (b) above.

    What complicates this a bit is the fact that a contribution to an IRA for a particular year can be made through the filing due date for the tax year in which the contribution applies. For example, an IRA contribution can be made as late as April 17, 2017, for the 2016 tax year. Thus, the five-year holding period would begin January 1, 2016, and end on December 31, 2020, so any distributions made January 1, 2021, and later would meet the five-year aging period. Each time a contribution is made to the Roth account, the aging period does not start over.

    The five-year aging requirements apply separately for traditional IRA conversions to a Roth IRA referenced in (b) above.

    If for some reason you decide to take a non-qualified distribution from your Roth IRA, i.e., one that does not meet the definition of a qualified distribution (discussed above), then the distributions are treated as made in the following order: from funds originally contributed as Roth contributions (which have no tax consequences), then from conversions of other retirement funds to a Roth IRA (which would be subject to early withdrawal penalties), and finally from earnings (which would be both taxable and subject to early withdrawal penalties).

    If you are planning early retirement or planning to tap your Roth IRA account and wish to explore your options while minimizing taxes and penalties, please call Dagley & Co. for an appointment.

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  • Back-Door Roth IRAs

    6 May 2016
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    Though many individuals who are saving for retirement favor Roth IRAs over traditional IRAs, not everyone is allowed to make a Roth IRA contribution. Many favor Roth IRAs because it allows for both accumulation and post-retirement distributions to be tax-free. In comparison, contributions to traditional IRAs may be deductible, earnings are tax-deferred, and distributions are generally taxable. Anyone who is under age 70.5 and who has compensation can make a contribution to a traditional IRA (although the deduction may be limited).

    High-income taxpayers are limited in the annual amount they can contribute to a Roth IRA. The maximum contribution for 2016 is $5,500 ($6,500 if age 50 or older), but the allowable 2016 contribution for joint-filing taxpayers phases out at an adjustable gross income (AGI) between $184,000 and $194,000 (or an AGI between $0 and $9,999 for married taxpayers filing separately). For unmarried taxpayers, the phase-out is between $117,000 and $132,000.

    However, tax law also includes a provision that allows taxpayers to convert their traditional IRA funds to Roth IRAs without any AGI restrictions. Although deductible contributions to a traditional IRA have AGI restrictions (for those who are in an employer’s plan), nondeductible contributions do not.

    Thus, higher-income taxpayers can first make a nondeductible contribution to a traditional IRA and then convert that IRA to a Roth IRA. This is commonly referred to as a “back-door Roth IRA.”

    BIG PITFALL: However, there is a big pitfall to back-door IRAs, and it can produce unexpected taxable income. Taxpayers and their investment advisers often overlook this pitfall, which revolves around the following rule: For distribution purposes, all of a taxpayer’s IRAs (except Roth IRAs) are considered to be one account, so distributions are considered to be taken pro rata from both the deductible and nondeductible portions of the IRA. The prorated amount of the deducted contributions is taxable. Thus, a taxpayer who is contemplating a back-door Roth IRA contribution must carefully consider and plan for the consequences of this “one IRA” rule before making the conversion.

    There is a possible, although complicated, solution to this problem. Rolling over IRAs into other types of qualified retirement plans, such as employer retirement plans and 401(k) plans, is permitted tax-free. However, a rollover to a qualified plan is limited to the taxable portion of the IRA. If an employer’s plan permits, a taxpayer could roll the entire taxable portion of his or her IRA into the employer’s plan, leaving behind only nondeductible IRA contributions, which can then be converted into a Roth IRA tax-free.

    Before taking any action, please call Dagley & Co. to discuss strategies for making Roth IRA contributions or to convert existing traditional IRAs into Roth IRAs.

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  • Tax Filing Deadline Rapidly Approaching

    29 March 2016
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    Sit down and get to work. Tax day is just a few weeks away! For those of you who have not yet filed their 2015 tax return, tax day is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. Usually April 15 is the due date, but because Friday, April 15, is a legal holiday in the District of Columbia (where the IRS is headquartered), the filing date is advanced to the next day that isn’t a weekend or holiday – Monday, April 18 – even for taxpayers not living in DC.

    In addition, the April 18, 2016 deadline also applies to the following:

    Tax year 2015 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due.  Late payment penalties and interest will be assessed on any balance due, even for returns on extension.  Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.

    Tax year 2015 contributions to a Roth or traditional IRA – April 18 is the last day contributions for 2015 can be made to either a Roth or traditional IRA, even if an extension is filed.

    Individual estimated tax payments for the first quarter of 2016 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2016 estimated taxes are due on April 18.  If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. If the refund won’t be enough to fully cover the first installment, you may need to make a payment with the April 18 voucher. Please call this office for any questions.

    Individual refund claims for tax year 2012 – The regular three-year statute of limitations expires on April 18 for the 2012 tax return.  Thus, no refund will be granted for a 2012 original or amended return that is filed after April 18. Caution: The statute does not apply to balances due for unfiled 2012 returns.

    Note: The deadline for any of the above actions is increased by an additional day, to April 19, 2016, for taxpayers who live in Maine or Massachusetts because of a holiday observed on the 18th in Massachusetts which affects the IRS Service Center located in Massachusetts that serves these two states.

    If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 18 deadline.  Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute.  If it is apparent that the information will not be available in time for the April 18 deadline, then let the office know right away so that an extension request, and 2016 estimated tax vouchers if needed, may be prepared.

    If your returns have not yet been completed, please call Dagley & Co. right away so that we can schedule an appointment and/or file an extension if necessary.

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  • Breaking News: IRS Releases Pension Limits For 2016

    4 November 2015
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    You’ve heard it once, and you’re hearing it again: Saving for retirement is one of the most important things a person should do. Contributing to tax-advantaged retirement plans while you are working is one of the best ways to build up that nest egg. That said, the tax law doesn’t allow unlimited annual contributions to these plans.

    If you have been wondering how much you can contribute to your retirement plans in 2016, the IRS has released the inflation-adjusted limits for next year’s contributions. Since inflation has been low this past year (according to the government’s calculation), most limits won’t increase over what they were in 2015, but some of the AGI phaseout thresholds that work to reduce allowable contributions will change. Here’s a review of the 2016 numbers:

    For 401(k) plans, the maximum contribution will be $18,000 again. If you are age 50 or over, that limit is increased by a so-called “catch-up” contribution to a maximum of $24,000, the same as in 2015. These limits also apply to 403(b) tax sheltered annuities and 457 deferred compensation plans of state and local governments and tax-exempt organizations.

    Traditional IRA and Roth IRA contributions are limited to a combined total of $5,500 ($6,500 if you are age 50 or over), also unchanged from 2015. However, both types of IRAs have certain income (AGI) limitations.

    When you are an “active participant” in another qualified plan, the traditional IRA contributions are only deductible by lower-income individuals, and the deductibility phases out for unmarried tax filers with AGIs between $61,000 and $70,999. For married joint filers the phaseout range is between $98,000 and $117,999. The phaseout of traditional IRA contributions starts at $0 AGI for married individuals filing separately and tops out at $10,000—essentially, MFS filers rarely qualify to contribute to an IRA if they or their spouses also participate in an employer’s plan. For married couples in which one spouse is an active participant and the other is not, the phaseout AGI limitation for the non-active participant spouse has gone up by $1,000 and is between $184,000 and $193,999.

    Roth IRA contributions are never tax deductible, although they do enjoy tax-free accumulation. However, the contribution limits are phased out for unmarried taxpayers with AGIs between $117,000 and $131,999. For married joint filers the phaseout range is between $184,000 and $193,999. Each of these amounts reflects a $1,000 increase for 2016. Married individuals filing separately are not allowed Roth IRA contributions if their AGI is $10,000 or more. The AGI phaseouts will limit the contributions you can make to a Roth IRA even if you do not participate in an employer’s plan or other qualified plan. Unlike traditional IRAs, contributions to which cannot be made after you reach age 70½, contributions can be made to a Roth IRA as long as you have earned income of an equal amount.

    If you are self-employed and have a self-employed retirement plan (SEP), the maximum contribution is the lessor of $53,000 (the same limit as for 2015) or 20% of the net earnings from self-employment; contributions are allowed regardless of age. If your retirement plan is a profit-sharing Keogh plan, the limitations are the same. For defined benefit plans the amount contributed can’t create an annual benefit in excess of the greater of $210,000 or 100% of your average compensation for the highest 3 years.

    Simple IRA or Simple 401(k) plan contribution limits will be $12,500 or $15,500 for those ages 50 or over. These amounts are unchanged from 2015.

    If have questions or would like to discuss your retirement contribution options, please get in touch with us at Dagley & Co! You’ll find our information at the bottom of this page.

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  • Retirement Savings: the Earlier One Starts, the Better

    16 February 2015
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    Retirement

    We know, we know: Most teenagers and young adults do not consider the long-term benefits of retirement savings. Their priorities for their earnings are more for today than that distant, and rarely considered, retirement. Yet contributions to a retirement plan early in life can enjoy years of growth and provide a substantial nest egg at retirement.

    Due to its long-term benefits of tax-free accumulation, a nondeductible Roth IRA may be the best option. During most individuals’ early working years, their income is usually at its lowest, allowing them to qualify for a Roth IRA at a time where the need for a tax deduction offered by other retirement plans is not important.

    Because retirement may not be their focus at that age, young adults may balk at having to give up their earnings. Parents, grandparents, or other individuals might consider funding all or part of the child’s Roth contribution. It could even be in the form of a birthday or holiday gift. Take, for example, a 17-year-old who has a summer job and earns $1,500. Although the child is not likely to make the contribution from his or her earnings, a parent could contribute any amount up to $1,500 to a Roth IRA for the child.*

    But keep in mind that young adults, like anyone else, must have earned income to establish a Roth IRA. Generally, earned income is income received from working, not through an investment vehicle. It can include income from full-time employment, income from a part-time job while attending school, summer employment, or even babysitting or yard work. The amount that can be contributed annually to an IRA is limited to the lesser of earned income or the current maximum of $5,500.

    Parents or other individuals who contribute the funds need to keep in mind that once the funds are in the child’s IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability.

    Consider what the value of a Roth IRA at age 65 would be for a 17-year-old who has funds contributed to his or her IRA every year through age 26 (a period of 10 years). The table below shows what the value will be at age 65 at various investment rates of return.

    Value of a Roth IRA
    Annual Contributions of $1,000 for 10 years beginning at age 17

    Investment Rate of Return 2%           4%           6%         8%
    Value at Age 65     $23,703  $55,449  $127,900  $291,401

    What may seem insignificant now can mean a lot at retirement. Individuals who are financially able to do so should consider making a gift that will last a lifetime. It could mean a comfortable retirement for your child, grandchild, favorite niece or nephew, or even an unrelated person who deserves the kind gesture.

    *Amounts contributed to an IRA on behalf of another person are nondeductible gifts by the donor and are counted toward the donor’s annual $14,000 (2014 and 2015 gift exclusion per done).

    If you would like more information about Roth IRAs or gifting contributions to a Roth on behalf of someone else, please contact us at Dagley & Co.

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