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Is This a Good Idea or Not? | Tax Tip of the Week | No. 165 September 26, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Using IRAs to Cover College Expenses

College students have now headed back to school.  But how are you going to pay for the next year of college? Some people will be able to write the check.  But the majority of the population relies on loans, grants, scholarships, funds from family members and student earnings to cobble together enough money to pay the bills.  What if it isn’t enough? Can you use your retirement savings to help pay the bill? 

First of all, consider whether you should use your retirement assets.  Are you putting your retirement at jeopardy to give your student a chance to have a good life?  Many advisors will tell you that you can borrow to pay for college, but you cannot borrow to pay your expenses in retirement.  The message is to look for all possible sources of cash before you consider using your retirement funds.

If you are over the age of 59 1/2, you have access to your retirement funds without penalty.  You will have to pay income tax on any distributions you take, but the retirement funds are now available for you to use as you wish. 

A problem exists if you are under age 59 1/2 and are subject to the 10% early distribution penalty.  Fortunately, payment of higher education expenses is an exception to this penalty and the tax code is generous about applying this exception.  The IRA owner can pay for expenses for himself, his spouse, or the children or grandchildren of either the account owner or the spouse.  You can apply the exception to the unreimbursed payment of tuition, books, fees, supplies and required equipment – in other words, the expenses minus any financial aid.  Room and board are qualified expenses if the student is enrolled on at least a half-time basis.  The expenses must be paid in the same year that a distribution is taken from the IRA. 

Good luck to all those students who returned to college this fall.  And good luck to those that are footing the bill.  Use your retirement assets only as a last resort and don’t pay the early distribution penalty if you qualify for this exception!As always, give us a call if you have any questions.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

Low-Hanging Fruit | Tax Tip of the Week | No. 164 September 19, 2012

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IRAs – The Next IRS Audit Target?

According to the Treasury Inspector General for Tax Administration, the government allows $260 million in taxes to go uncollected each year for missed IRA withdrawals and contributions that break the IRA rules.

Why is this such a tempting target for the IRS?  Over 46 million U.S. households have a combined $4.9 trillion in IRA assets.  As one IRS expert stated, “this is low-hanging fruit.”

Many taxpayers are susceptible to taxes and penalties simply because they don’t understand the myriad IRA rules.  The following are some of the more common mistakes taxpayers make:

– Failure to withdraw.  When an IRA owner reaches age 70 ½ they must start taking Required Minimum Distributions (RMDs).  The penalty for not taking an RMD is 50% of the required distribution amount.

– Inherited IRAs.  When you inherit an IRA the distribution rules are different.  A full discussion of the rules of inherited IRAs goes beyond the scope of this article.  The short answer, however, depends on whether it is a spouse or non-spouse who inherits the IRA and whether or not the owner of the IRA had begun taking RMDs or not.  It is important to note that if a non-spouse inherits a Roth IRA there is another set of distribution rules that must be considered.

– Contributing too much.  Generally, an excess contribution to a traditional or Roth IRA  is any amount over $5,000 a year, or $6,000 a year if over 50 years old.  Any excess contributions not corrected before October 15 of the following year are subject to a 6% excise tax and taxes on any earnings.  It is important to remember that contributions are allowed only if you have earned income that exceeds the contribution amount.  Sometimes taxpayers have an excess contribution if they elect to file their tax return as Married Filing Separate instead of Married Filing Jointly.  This is because the maximum amount of earnings is only $10,000 when you file separately before you are phased-out of making a contribution.

– Improper Rollovers.  If you move IRA assets from one account to another you have 60 days to complete the transaction.  If the rollover does not occur in that 60 day window then 100% of the balance becomes taxable.  It is typically best to make any rollovers a “trustee to trustee” transfer.  But even then, it is important to keep good records and make sure the transfer is done properly.

IRA rules can become very tricky.  Be sure to give us a call if you have any questions or will be encountering any IRA issues.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

A Much Needed Change | Tax Tip of the Week | No. 163 September 12, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , 2comments

Ohio Municipal Tax Update

Hearings began a couple of months ago to find a way to simplify Ohio’s city income tax laws. 

Ohio is one of only 10 states where municipalities assess and collect an individual and business income tax.  All 10 states except Ohio and Pennsylvania have 22 or fewer cities assessing a municipal income tax, compared to almost 600 in Ohio.  To make matters more difficult, only Ohio allows each city to set their own definitions of income and other regulations.

The Ohio Society of CPAs has been a leading advocate to get Ohio lawmakers to address the need for municipal income tax reform.  The following is some of the testimony they recently presented: 

“The problem is that Ohio’s strong home-rule orientation allows communities not only to set their own income-tax rates, which is an appropriate accommodation to differing local circumstances, but also to establish policies such as what constitutes business income and residency.” 

“It’s easy to see the paperwork nightmare this presents to a business with operations in more than one Ohio municipality: They can spend a fortune in time trying to sort out how many hours their employees worked in various communities, then applying each community’s unique tax code to those hours.”

Just this week, our firm had to prepare 49 city tax returns for one of our small business clients that deliver services throughout the area!

To learn more about the efforts to streamline Ohio’s municipal income taxes and to keep up with developments click here.

We will keep you posted on this much needed tax reform.

As always, give us a call with any questions you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

A Recent Tax Court Update | Tax Tip of the Week | No. 162 September 5, 2012

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No Records – No Basis!

In yet another of a long series of court cases, the Tax Court upheld that if a taxpayer cannot prove their cost basis in a securities transaction, then the cost basis is zero.

In the most recent case a Mr. Bilyeu admitted he sold over $20,000 in securities but tried to maintain that he should only pay taxes on the differences between the sales price and his initial costs.  In court, however, the taxpayer relied solely on his own testimony with respect to the basis.  He presented no documentation to support his basis–not even any hand-written notes that showed the date and price paid.

The Court said: “We are not required to, and we shall not, rely on a petitioner’s testimony to establish the basis that he had in each of the securities disposed of……” (see Bilyeu, T.C. Memo 2012-161, June 11, 2012).

In all probability, the net sales proceeds should have been taxed at much more favorable long-term capital gains rates. In the absence of proof, however, the entire proceeds were taxed as short-term gains (or ordinary income rates).

As we have stated many times in these Tax Tips, substantiation is the key to winning against the IRS.

It should also be noted that Mr. Bilyeu represented himself in Court—never a good idea!

As always, give us a call with any questions you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.