Retirement Plan and IRA Rollover Advice

When moving your retirement money to an IRA, you should follow this one rule of thumb.

If you fail to follow the rule I’m about to reveal, you can face two big problems.

• First, your check will be shorted by 20 percent.
• Second, you will be on the search for replacement money.

Here is this very important rule of thumb that you need to follow: Move the money using a trustee-to-trustee transfer. Nothing else.

There are two types of transfers that can be used to move qualified plan distributions into IRAs in a tax-free manner: (1) direct (trustee-to-trustee) rollovers and (2) what we will call traditional rollovers.

If you want to do a totally tax-free rollover, do nothing other than the direct (trustee-to-trustee) rollover of your qualified retirement plan distribution into the rollover IRA.

This is easy to do. Simply instruct the qualified plan trustee or administrator to (1) make a wire transfer into your rollover IRA or (2) cut a check payable to the trustee of your rollover IRA (this option is less preferable than a wire transfer).

Your employee benefits department should have all the forms necessary to arrange for a direct rollover.

If you want to discuss the trustee-to-trustee rollover with me, please don’t hesitate to call me on my direct line at (805) 264-3305.

Sincerely,
Bob
Robert W Craig, EA Tax Services

P.S. Also use the trustee-to-trustee rollover when moving your IRA to another IRA.

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Tax Traps to Avoid in Retirement

Tax Traps to Avoid in Retirement
By Charles Sherry, M.Sc.

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”

It’s a quote that comes down to us from Benjamin Franklin, who uttered the phrase in 1789.

Taxes–federal, state, local, sales tax, property tax, gasoline tax, payroll tax, tolls, fees, taxes on capital gains, dividends and interest, gift tax, inheritance tax, and cigarettes and alcohol. There has even been a rising chorus that is calling for a special tax on junk food.

Yes, Ben Franklin nailed it. We can’t escape taxes. Before we jump in, let me say that this is a high-level summary. It’s designed to educate and avert surprises. Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam. But preparation can reduce the tax bite and eliminate unexpected surprises.

As I always emphasize, feel free to reach out to me with specific questions, or consult with your tax advisor.

That said, let’s get started.

1. Estimated quarterly tax payments may be required.

If you have never been self-employed, you are accustomed to having federal, state (if your state has an income tax), and payroll taxes withheld from each paycheck.

When you stop working, there are no more W-4s to complete and no one is withholding taxes for you. But that doesn’t absolve you of your year-end tax liability.

You can make estimated payments each quarter. You can also have taxes withheld from your pension, social security, or IRA distribution.

If you have yet to file for social security, you may choose to have Social Security withhold 7%, 10%, 12% or 22% of your monthly benefit for taxes. Or you may decide not to have anything withheld.

But make sure enough is withheld or your estimated quarterly payments are sufficient. Otherwise, you may face a penalty.

Does it sound complicated? You don’t have to go it alone. Tax planning is a part of retirement income planning. If you have any concerns or questions, please reach out to me.

Check out this IRS link: https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty

Link to IRS Withholding Calculator: https://www.irs.gov/payments/tax-withholding

2. Social security may be taxed.

If you file as an individual and your combined income (adjusted gross income?+ nontaxable interest?+?half of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.

If the total is more than $34,000, up to 85% of your benefits may be taxable. Additionally, 13 states–Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia–tax Social Security.

3. Beware of the required minimum distributions for retirement accounts.

Let me put this right up front: failure to take the required distribution could subject you to a steep penalty.

Required minimum distributions (RMDs) are minimum amounts that retirement plan account owners must withdraw annually starting with the year they reach 70½ years of age or, if later, the year in which they retire.

However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, RMDs must begin once the account holder is 70½, regardless of whether he or she is retired (IRS: Retirement Plan and IRA Required Minimum Distributions FAQs).

RMDs are not required for Roth IRA owners.

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.

The RMD rules also apply to SEP IRAs and Simple IRAs, 401(k), profit-sharing, 403(b), 457(b), profit sharing plans, and other defined contribution plans.

If you expect to have large RMDs that could push you into a higher tax bracket, it may be beneficial to begin taking distributions prior to 70½. Or, you could convert some of your IRA into a Roth, which will help shelter gains and future distributions from taxes. You pay a tax upfront, but it’s one strategy that can help minimize taxes long-term.

4. The hidden cost of selling your primary residence.

Downsizing can generate cash and reduce your daily expenses. But beware that it may also trigger a tax liability.

If you’ve lived in your primary residence for at least two of the last five years prior to selling, you can exempt up to $250,000 of the profit from taxes if you are single and up to $500,000 if you are married. If you are widowed, you may still qualify for the $500,000 exemption (IRS: Publication 523 (2017), Selling Your Home).

The sale may also trigger the 3.8% tax on investment income. It’s a complex calculation that can ensnare single filers who have net investment income and modified adjusted gross income above $200,000 and $250,000 for married filers. (IRS: Questions and Answers on the Net Investment Income Tax).

The decision to sell shouldn’t be strictly governed by the tax code. However, it’s important to understand the tax ramifications. Timing income streams might be beneficial if a sale will trigger a taxable event.

There are other methods to lower your taxes, including charitable donations. How we structure retirement income, your investments, and distributions from retirement accounts can help to reduce the tax burden. If you need assistance on any of the points I’ve shared, we are happy to assist. Please email me at rcraig1044@aol.com or call me at (805) 264-3305 and we can talk.

Bob

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Time Limit to Correct Social Security Earnings Statement Before It’s Too Late!

Here’s a link to an important article about keeping a eye on your social security earnings records.

There are strict time limits on fixing any errors in your social security earnings record that you need to be aware of. Not correcting the error(s) in a timely fashion could cost you benefits for a lifetime.

http://socialsecurityintelligence.com/check-your-social-security-earnings-statement-before-its-too-late/

If you have any questions about this please feel free to call me.

Bob
Robert W Craig, EA Tax Services
(805) 264-3305

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Crazy Tax Rules for Recreational Gamblers

Gambling is an ever-popular pastime, but did you know that gambling can have very serious tax implications?  These are crazy and in my opinion are unfair, but they are in the tax law and courts have had their say to uphold them.

Theoretically, the full amount of gambling winnings (unless you qualify as a professional gambler, which this post assumes that you are not) must be reported on the miscellaneous income line of Form 1040, page 1.  Winnings include cash, prizes, jackpots, lottery winnings, raffles, as well as installment payments on winnings.

For most types of gambling at legitimate gaming facilities, you’ll receive a Form W-2G if you win over certain amounts.  These must be reported on the miscellaneous income line.  When you get one of these forms remember that the IRS also gets a copy of the form, and the IRS computers will be looking for these amounts on your tax return.  If they don’t find them, the computer will spit out a notice of tax deficiency.

Many people think that just because they might win some jackpots, but lose money overall they do not need to report the winnings.  This is not true, they must show these winnings.

That being said, you may (assuming you’ve kept the required proof and documentation) deduct your gambling losses but only to the extent of gambling winnings.  This deduction is taken on Schedule A in the miscellaneous itemized deduction section.  Now gamblers who may not have enough Schedule A deductions itemize cannot get a tax deduction for these losses.

You can see the problem here.  Even though there is technically a deduction for losses to extent of winnings, a taxpayer may not get the deduction and even if they do get to take it, they may not get full benefit due to mathematical computations that have to be made.

In addition, since you must include the entire amount of winnings on page 1, this increased your Adjusted Gross Income (AGI) and this could devastating effects on your taxes since there are a good number of limitations that are driven by AGI.  For example, taxable Social Security benefits are driven higher by a higher AGI figure.  Rental real estate losses are phase out by higher income.  The child tax credit, education credits and other items are potentially reduced or eliminated by higher AGI.  Also any allowable medical deduction on Schedule A is reduced as AGI increases.  These are some but there are more, but you get the idea.

Documentation Wagering Losses: The IRS allows players to simply record the net winning or net loss from each gambling session.  A session is deemed to end when a player cashes out or runs out of money.  At this point it’s possible to calculate how much was won or lost during that particular session.  The taxpayer/player then reports the sum of all the net winning sessions on page 1 of the tax return, and the net sum of all the losing sessions on Schedule A miscellaneous itemized deductions.  Care must be taken to assure that the total net winning session totals are greater than or exceed the total of Forms W-2G’s received and make adjustments to assist the IRS computers in matching the numbers, or there will be a letter from them.

Gambling losses must be adequately documented to be deductible.  Under IRS Revenue Procedure 77-29, an amateur gambler must record the following information in a log or similar record:

  1.  Date and type of specific wager or wagering activity,
  2. Name and location of the establishment,
  3. Amount won or lost
  4. Names of any other people present with you at the gaming establishment,
  5. Slot machine #, table #,
  6. Winning statements and unredeemed tickets,
  7. Bank withdrawal slips, ATM advances and such with the dates showing the source of the ‘gambled’ funds.

    For a handy Gambling Log and info, click below and print out the handout:

    Gambling Log

    There’s no place for gambling when it comes to preparing your federal and state tax returns. Play it safe and take this article to heart if you plan to hit the casino or racetrack. The IRS and courts require that these records are kept in close proximity in time to the gambling trip so don’t wait to recreate the required records, do them now.

    If you have questions on how to do this or think you may have an issue in this area, please call me at (805) 264-3305. Also I have a Gamblers Handout and Log Record available for the asking.

    Thanks for reading. Bob

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Facebook & The Elderly

Got an email from Perry Marshall (the Google Adwords marketing guru) today: (note: I’ve added my own comments in italics)

Yesterday I heard from a very reliable source that Facebook has triggered a sea change in the nursing home industry. This comes from a client of one of my business mentors.

The #1 reason people die is their friends have died and their family doesn’t visit them anymore, and they have no more reason to get up in the morning. I’m sure all of us have visited long-term care facilities and seen the blank stares and hopelessness of aged people living out their last days.  Guess its based on the “will to live” concept.

Facebook has changed that. There are many, many 77 year old folks in nursing homes who now have 60 Facebook friends and interact with them on an hourly basis. This is literally extending life spans – to the point of wreaking havoc in the long-term care industry.

This is because many of the payment models are based on people living only so long and their communities on Facebook are literally extending their lives.

(It’s also creating some interesting social gaffes. Like after a person dies their friends are still getting reminders:  “You haven’t reached out to Ethel for awhile. Send her a note. Click here to POKE Ethel.”) Small price to pay for having them around longer and happier.

It’s also obliterating illiteracy. Kids might be able to fake reading books in school, but they can’t fake writing comments on their friends’ pages. I seriously believe that within 5 years, nearly every single kid in the developed world will be able to read, write and type – because of Facebook.  Spelling and grammar I’m sure will still be an issue, but its a start

Within 10 years, the same will be true in developing countries – because of mobile phones. I heard of a video of men with pickaxes in Rwanda digging 6 foot trenches for fiber optic cable. Rwanda is rapidly becoming the most wired country in Africa.

To hard-core, driven business types, Facebook might seem like a toy. That’s what most people thought about the Internet 10-12 years ago. It turned out to be something much bigger than that.

 Sounds like good news all the way around.

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