Category Archives: IRA Distributions

Beyond basic estate planning – helping your heirs sort it all out

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When we talk about estate planning, most people think of signing a will (some may even mention a revocable trust as well).  But having signed documents is only the beginning; not following through can still leave a mess for your heirs.  You need to go beyond the basic plan. 

The Basic Plan – means you executed a will and probably a revocable trust, updated beneficiary designations and changed ownership to match your documents to minimize estate taxes and control flow of your inheritance.  For this post, we assume you have a good plan (check out the post to be sure) and if you have not acted, please see estate planning checkup: why you don’t, why you should. 

Beyond Basic – is the focus of this post so you prepare the people who survive you so they can assemble the pieces you leave behind and make decisions.  We review this roughly in the order in which they will have to address everything and respond so nothing is left unresolved. 

Write notes or better provide a memorandum now

How do you address “beyond basic estate planning”?  One way is to have a detailed conversation or better yet to  provide a memorandum for your personal representative, trustee, children or close friend that can help them navigate all the steps required after your death.  Start by with telling them where to look for everything.  But a good “beyond basic estate planning” plan encompasses more than listing where to locate the documents you signed, it tells survivors who to notify (attorney, tax preparer, insurance agent), how to access your accounts on line or in person, and who gets what and when.  

Note:  make sure they know where your original will is located, as well as whom to contact.  Not having the original can cause problems.  Same for other originals like stock certificates and car titles. 

Notifications

When you die, the first step for your survivors will be to notify family and friends and to arrange for services.  Make sure your survivors know everyone you want them to contact or even who you don’t want attending your services.  Also, make sure they know if you want to be buried or cremated.  If you have a plot, let them know where.  If you envision a particular service, tell them. 

Beyond telling friends and family of your services, there will be more notifications:

Professionals – make sure they know your attorney and tax prep person so they can notify and they can be ready for their roles – more on this below.

Medical professionals – depending on your death, your family will want to make sure your family doctor and others are notified. 

Social Media – do you want them to post about your demise on social media? – more on this below.

Social Security – your heirs will need to inform the administration so that they stop your benefit.  Your spouse will need to sign up for the spousal benefit.  

Banks and investments – your heirs will need to let banks and brokers know so no one other than your personal representative tries to gain access. 

Board of directors or other office positions – if you are on a board or hold office, be sure survivors know whom to contact. 

Death certificate 

Soon after your death, a medical examiner will produce a death certificate.  That will be required for filing in probate, if necessary, and for access to benefits and accounts or making certain transfers.  Your personal representative will want to provide copies to your attorney but hold some copies for transferring accounts and titles.  

Internet age – social media and online accounts  

What do you want your heirs to do with your social media?  You want to avoid anyone gaining access and attempting identity theft.  Do you want them to leave your profile active for a period? 

Do you have shared accounts where you are the manager, such as a photo stream on your smartphone?  Be sure survivors know how to access and copy.  For instance, anything in an Apple photo stream disappears once the source photo is deleted so deleting your iPhone account could cause all photos taken by you to be lost and pictures you contributed to various photostreams will disappear.  Check with your provider to be sure how to archive what you want archived.

The same may apply to other items stored on your smartphone.  You may need to maintain your account until others access and save everything.  You can also setup cloud storage and make sure they know how to access. 

How do they access your online accounts?  How do they terminate all those subscriptions you never canceled?  Your memorandum should include information for key people that are likely to survive you.  They will need IDs and passwords for all your online accounts.  You may also want to provide access to your smartphone so they can use the apps that may have reward balances. 

With access to your online accounts, they can stop recurring payments, end subscriptions, and pay bills until they have access to your assets.  If your assets are already in trust, the trustee may be able to pay bills as required.  If your assets are not in trust, the personal representative will need to transfer them to estate accounts after being appointed. 

Make sure your list of all IDs and passwords identifies key accounts and is provided to somebody you trust so they can manage access until accounts are transferred. 

Assets and accounts

When listing your online accounts, provide a detailed list of all your assets so nothing is overlooked and ends up unclaimed.  Your survivors may be able to see the accounts on line and provide statements to your attorney. 

If you are holding assets for others or promised to make a gift (see below), be sure to state this in your memorandum. 

As noted above, they will need certain originals, like your will and titles to cars.  If you hold certificates for stocks or bonds, they will need to know where to look – a safe deposit box?  If you have cryptocurrency or other digital assets, they will need to know where your wallet is and how to access your accounts. 

Specific gifts of personal items

If you have items for which you have certain people in mind, make sure your personal representative knows.  As noted above, if you are holding items for others or have promised to make gifts, be sure your personal representative knows your intent.  You may also want certain personal items to go to specific people, such as heirlooms, jewelry, memorabilia, etc.  You may have signed a tangibles memorandum with your will; if not, be sure to list items and recipients.

Life insurance and benefits

If you have life insurance, make sure they know where the policy is and who handles it.  The personal representative will need to contact them to arrange payment to the policy beneficiaries. 

The same for any pension for survivors and other benefits. 

Retirement plans

If you have qualified plans, make sure beneficiaries know they will be receiving your account.  They may need a death certificate and have forms completed by the personal representative to have the account transferred to them as an inherited IRA. 

Tax returns

Notify your tax preparer so they know to advise on what needs to be filed.  They will file a tax return for the part of the year when you were living and then an estate return for the remainder. 

Conclusion

Think through all you do now and imagine what others would require in order to be able to do those things then write it down!  Save your survivors from having to be detectives. 

In the end, your memory will survive and you will be known for your deeds and how you treated others. 

Steven

Planning for the 10-year clean out rule and inherited IRAs

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Inherited IRAs and RMDs

The SECURE Act of 2019 eliminated the “stretch IRA,” where children could continue to defer taxes on IRA balances inherited from parents, even passing them on to grandchildren.  This had allowed for decades of tax-free asset growth.  Congress decided to curtail the deferral past spouses by requiring that IRAs passed to non-spouses be fully distributed at the end of 10 years, with a few exceptions. 

Confusion has arisen regarding whether all amounts must be withdrawn annually or “cleaned out” in year 10.  The IRS added to the confusion by offering different interpretations after the law was enacted.  To address this confusion, the IRS responded by not penalizing IRA beneficiaries who failed to take distributions while the rules are finalized. 

The IRS proposed rules require that annual distributions continue if the original IRA owner had begun taking required minimum distributions (“RMDs”), while allowing beneficiaries of IRA owners who had not begun taking RMDs to choose to take some distributions or wait until the 10th year. 

An heir will need to plan to minimize the tax hit.  For example, they may be able to keep their total income in a lower tax bracket.  The simplest approach may be to just take 1/10th each year, so they do not end up in a higher bracket.  This may not be best if the beneficiary’s income has significant changes for bonuses, major stock sales, taking their own RMDs or starting social security.  We reviewed possible strategies with Harold Hallstein IV of the Sankala Group who said that, surprisingly, someone in a low tax bracket who expects to be in a higher bracket in the future may benefit from taking the account balance right away, thereby availing themselves of long-term capital gains rates on future investment growth. 

One note of caution: beneficiaries need to be sure to set up the inherited IRA account and not take a check, as that will be fully taxable.   

Let us know if you have any questions. 

Good luck

Steven

Mid-Year planning – Rates, Roths and Rules

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Checking your income tax planning now is a good idea – tax planning can be done year-round.  As with any planning, acting while you can have an impact is best.  Tax laws may change before the end of 2022, e.g. Secure Act 2.0 may be adopted, but it’s still wise to know where you stand now. 

The IRS seems to have a similar thought about tax planning as they created a website with tools and resources at Steps to Take Now to Get a Jump on Your Taxes – if you check it out, let us know what you think.

First question:  did you get a tax refund, or did you owe? 

Refunds

Some people enjoy seeing a big refund, but as you may have heard, you are giving the government an interest-free loan with your money.  If you want to save, there are better ways, like an auto-debit to an IRA or to a savings account.

Not sure what happened to your refund?  There is a updated IRS tool for “where’s my refund” that now goes back three years at “Where’s My Refund?” 

The tool confirms receipt of your tax return, shows if the refund has been approved and indicates when it will be or has been sent.  If three weeks pass without receiving the refund, then you may want to contact the IRS.

Owed taxes

If you owed a significant amount for 2021, the IRS has another tool that helps make sure you have enough withheld for 2022 at Tax Withholding Estimator.  This way you can avoid penalties and interest for under withholding. 

If you do not get clear answers using the estimator tool, try comparing your 2022 paystub to your 2021 tax return, review the IRS guidance at Publication 505, or contact us for help.  

Second question: what happens if you act now?

Marginal vs. average tax rate

Knowing the rate at which additional net income will be taxed helps you make decisions such as the one in the next section, whether to convert an IRA to a Roth IRA or not. 

The marginal rate is your tax bracket, the rate at which the last portion of your income is taxed.  Any additional income would be taxed at this rate.  Your average tax rate is the percentage of income taxes to total taxable income.  You can have a low average rate but hit a high marginal rate, which may mean that taking more income into the current year would be costly. 

Time to convert to a Roth IRA?

The decision to convert a traditional IRA to a Roth IRA depends on several factors.  One is the rate of tax you pay now compared to the rate you expect to pay in retirement.  If your rate will be the same at retirement as now, then there are many reasons to convert, such as no required minimum distributions at retirement for a Roth IRA.  If your tax rate at retirement will be significantly less than currently, then converting now would be less tax efficient. 

If you want more on this decision, see “To Roth or not to Roth?” or check out Pros and Cons here.

Also, we discussed the back-door Roth IRA in our year-end post on 2021 tax planning.  

Last question:  how with this affect the rest of your finance?

Coordinate with investing and estate planning

Make sure any changes take for tax reasons do not foul your investment or estate planning. For more on estate planning, see estate planning checkup post. 

Summary

As you review your 2022 tax planning, check your 2021 returns for ideas on what to adjust, consider the impact of future tax rate increases and act when the impact on other planning also makes sense. 

Let us know if you have any questions. 

Good luck

Year-end Tax Planning and the Pandemic

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Tax Planning and the Pandemic

We face a challenging time for planning:  The election resulted in a new President while the rate of Covid-19 infections (and deaths) continues to rise.  This has affected the economy, resulted in some tax law changes and may yield more stimulus to restore the economy.  Also, there may be more changes in 2021.  This post is intended to help you make the best tax-efficient moves before 2021 begins.  

2020 year-end tax planning – update on using the tax laws to save you money

In 2018, we provided a three-part series explaining the impact of the new tax law.  In our first part, we discussed the impact of the new law on personal taxes and in our second part, we discussed planning for small businesses.  This update replaces the third part from December 2018, as updated December in 2019 – it is our guide for year-end moves to reduce total taxes between 2020 and 2021.  But, before getting to the planning steps, we address the uncertainty caused by possible tax changes in 2021 and review some recent changes from earlier this year. 

Possible Tax Law Changes under Biden

President-Elect Biden campaigned on raising taxes for corporations and for individuals making over $400,000 of income.  However, even if the Senate seats in Georgia go to Democrats in January, the lack of a “Blue Wave,” a sweeping Democratic mandate, means that the tax hikes are unlikely to pass.  Furthermore, the President-Elect has made clear that controlling Covid-19 and economic recovery are the top priorities of his new administration. 

What did President-Elect Biden propose?  He would restore the 39.6% bracket for couples making $622,050 or more ($518,400 for singles), add a 12.4% social security tax for income over $400,000, place a 28% limit on itemized deductions for high income taxpayers, restore the 20% long-term capital gains rate for high income returns (and even apply ordinary rates on gains of taxpayers over $1 million), and limit the Qualified Business Income Deduction and opportunity zone credits.  For estate taxes, he would reduce the current $11.58 million exemption to a lower amount, perhaps $5 million or even $3.5 million, and eliminate the step-up in basis at death. 

While none of these changes are likely, there may be narrow tax hikes to fund infrastructure building and small tax breaks for lower earners (child/dependent care and elderly long-term care credits).  There may also be more stimulus action, such as more Paycheck Protection Program loans and business tax breaks for worker safety measures, as well as retirement savings incentives, tax extenders for items expiring this year, and tax breaks to encourage US manufacturing.  We will monitor activity on these matters for comment in future posts. 

Changes from the SECURE and CARES Acts for 2020

We wrote about the CARES act earlier this year, which waived the 10% penalty for coronavirus-related distributions from qualified plans of up to $100,000, with three years to pay the taxes due or redeposit as a roll-over, and suspension of required minimum distributions (“RMDs”). The act also allows larger plan loans.

The Secure Act delayed RMDs to age 72 and allowed individuals to contribute to IRAs after age 70 ½ if still working.   But the Act also limited the distribution of IRAs to a 10-year maximum for beneficiaries other than spouses and certain others, thus eliminating the “stretch IRA.” 

The Families First Act created credits for people unable to work due to Covid-19 illness and due to caring for others.  If you are affected, check to see if you are eligible for any of these tax credits. 

A reminder on the mortgage interest deductions

As you may recall, mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary and secondary residences.  Interest on home equity loans is not deductible, except when the home equity indebtedness is used to purchase or improve your primary or secondary residence.

Check taxes already paid

Make sure your total paid to the IRS and state via withholdings and estimates meets the safe harbor rules.  If not, you could owe interest for under-withholding. 

Now to the planning:  Can you act at all?   

Each year, we advise that you be practical, focusing on where you can actually make moves.  For many, the $24,800 standard deduction for married couples (more for over 65 taxpayers, and $12,400 for single taxpayers) means you will not itemize (i.e., your total for itemized deductions is less than the standard amount so you take the higher standard deduction).  And, if you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (but you can also stop collecting receipts for those deductions). 

There is one exception from the CARES Act, which provides a $300 above the line charitable deduction for cash contributions.  You get this regardless of itemizing. 

Some possible deduction strategies

One technique for getting around the limit on deductions is to bunch certain deductions from two or more years into one year.  However, the only deduction that you can easily move is for charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest. 

If you do not want any one charity to receive the full amount in one year, you can still use this bunching strategy to donate to a donor advised fund, from which you may be able to designate donations to particular charities in future years.

The tax planning steps

What can you move?  If you are able to itemize, determine what income and deductions you can move from 2020 to 2021 or vice versa.  You want to minimize total taxes for both years.  Make sure your planning includes the 3.8% Medicare tax on high income and a review Roth conversion.  Roth distributions are not taxed, so converting a traditional or roll-over IRA to a Roth could be beneficial, as long as the tax cost now is not too great – see more at Roth or not to Roth?  With the waiver of the 10% penalty for early withdrawals, a Roth conversion may be more attractive.  Business owners will want to review our post on planning under 199A for QBID. 

What is the effect of moving?  Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.

The AMT – Finally, watch for the Alternative Minimum Tax (“AMT”).  The AMT affects fewer people, but it is still wise to review so you avoid it. 

Retirement contributions

If you have not maxed-out your 401(k) plan, IRA, Health Savings Account or flex plan account, consider doing so before the end of the year.  The contributions reduce your tax able income while adding to savings.  But check out our post on paying debts vs. investing.

If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS-approved charity and having none of the distribution taxed.  The provision was great when you had an RMD to satisfy, but that was suspended for 2020.  That should not stop you if you still have the charitable intent. 

Business expenses

The deduction of unreimbursed business expenses was terminated by the new tax law.  That hurts many who are working from home this year, as they cannot deduct associated costs. 

We wrote about forming an LLC or S Corp. to report business expenses or taking expenses on Schedule C in our 2018 Part III post, but that applies to expenses for that business and we stressed that you will need a valid business purpose to form the LLC or S Corp. or use Schedule C for self-employment and take expenses.  Be sure to consult with an attorney before trying any of these ideas. 

Capital gains

Review your unrealized losses to see if you can “harvest” those losses to offset or “shelter” realized gains, reducing your total taxable income.  If you have more losses than gains, you can take up to $3,000 of capital losses against other income. 

If you sell an asset that you would prefer to retain, in order to shelter gains in 2020, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait 30 days or purchase a similar asset that fits your portfolio while not counting against the wash sale rule).  N.B. – when buying mutual funds late in the year, check for distribution dates so you do not purchase just before dividend and capital gains distributions, as you will owe taxes on those distributions. 

If you have significant unrealized gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation.  That is very effective tax leverage!

Estate plan review

While you review your taxes, review your estate plan as well.  The federal exemption is over $11 million in 2020, so fewer people will owe any federal estate tax.  However, that may change in 2021; also, many states still impose estate taxes on smaller estates. 

The individual gift and estate tax exemption is due to return to $5 million, adjusted for inflation, in 2026 and could be lowered sooner, as noted above.  That tax rate could also go up. 

If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now.  If your spouse joins you, that is $30,000 per person.  This includes funding a 529 plan for education cost – expanded to provide for more than just college – or an ABLE account for disabled dependents.  Note, however, that holding appreciated assets for the step up in basis at death may be better than gifting, but this could be eliminated as noted above. 

If you do review your estate plan documents, also review beneficiary designations to make sure everything is current.  And review your medical directive and durable power of attorney.  

Summary

Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2020 and 2021. 

Good luck and best wishes for happy and healthy holidays!

CARES Act, Stimulus checks, and other tax law updates

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Keeping in touch during these challenging times …

2019 due dates (tax season is not quite over yet)

The IRS extended all of the following deadlines to July 15th:

  • 2019 return or extension filing;
  • Payment of 2019 taxes due;
  • Q1 2020 estimate payment; and
  • Q2 2020 estimate payment.

Most states have followed the same delayed dates (but not all).  Let me know if you have a question on payment and filing. 

So “tax season” will be over soon, yea!

Stimulus checks and other changes

Many people are asking about their stimulus checks and expanded unemployment benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The Act also has other provisions including tax credits for self-employed affected by Covid-19, student loan payment delays, and relief on mortgage payments and rent.

Of the many posts regarding the stimulus checks and benefits, student loans and 401(k) distributions, here is a good summary from the NY Times. 

If you want to check on the status of your stimulus check, here is the IRS website to find the status or apply for your stimulus check.  If you expect a check that has not arrived, check out the links in this Huffington Post article. 

And if you received a check for a deceased relative (over 1 million were sent!), you need to return it to the Treasury, sorry. 

Small businesses

CARES Act includes benefits for small businesses: Payroll Protection Program loans; payroll deposit delays; and tax credits.  The SBA funds for the PPP ran out initially, but Congress added more funding. 

The key is to file so that the loan is forgiven, so that the funds become a grant.  The forgiven loan is not treated as income.  

If you need more information on these programs, let me know. 

2020 tax law changes

The required minimum distributions or RMDs are suspended for 2020.  This way, you do not need to sell funds at a low to withdraw and may even be able to redeposit funds that you already withdrew. 

The CARES Act waives the 10% penalty for early withdrawals from qualified plans for up to $100,000 for coronavirus-related circumstances. The distribution is taxed over three years. And, if the funds withdrawn are repaid to the plan within 3 years, that is treated as a tax-free roll over.  The act also allows loan from the plan up to the lesser of the vested balance and $100,000. 

For 2020, there is an above-the-line charitable donation deduction up to $300.  This should help charities that are responding to those impacted helping them raise money now.

More Scams and Hackers

Be wary of messages asking for personal information because scams are on the rise.  And be careful working from home, as there are more hacker attempts to gain access via the home connections to companies. 

If you want help dealing with any, let me know.

Personal impact

Being cooped up is challenging, even if it is the best way to stay healthy.  Make sure you practice self-care so you can handle this! 

I hope you and your loved ones are all managing this as well as you can.

If you want to just talk, I would be glad to set up a time, just let me know! 

Thank you, and be well

Steven