Tag Archives: IRA

Early Gift for Taxpayers – PATH Act Passed

Protecting Americans from Tax Hikes (PATH) Act
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Taxpayers received an early gift last week when the Protecting Americans from Tax Hikes (PATH) Act of 2015, also commonly referred to as the “extenders tax act,” was signed into law. This legislation permanently allows IRA participants over age 70½ to make annual tax-free distributions from their IRAs for charitable purposes.

Beginning immediately, a taxpayer, via direct transfer by the IRA trustee, can give up to $100,000 per year to the charitable organization of their choosing tax-free. The amount so distributable can count toward meeting a participant’s “minimum required IRA distribution,” but the amount so distributed will not be included in the participant’s Adjusted Gross Income.

Furthermore, since this IRA distribution is not included as income, no itemized deduction can be claimed for the corresponding charitable deduction.

In layman’s terms, the passage of PATH provides taxpayers an advantage by lowering their Adjusted Gross Income (AGI). A lower AGI results in a lower threshold for claiming various items on your individual tax returns, such as medical deductions, child tax credits, inclusions in income for example, Social Security, Roth IRA contributions, and the Obamacare 3.8% surtax on net investment income.

For more information and practical commentary regarding the PATH Act, review Accounting Today’s recent article or contact Aronson’s Tax Services Group at 301.231.6200.

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New 60-day IRA Rollover Rules Spell Trouble for Some

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Early this year, the U.S. Tax Court made a surprise ruling (Bobrow v. Commissioner) related to the 60-day IRA rollover rules. The ruling, which came as a shock to individuals and practitioners alike, completely contradicted the IRS’ previous position, the instructions in Publication 590 and years of practice.

Prior to the ruling, individuals could take distributions from their IRAs and, if they deposited the amount(s) or some portion thereof back into an IRA within 60 days, not have a taxable distribution. Previous guidance held that an individual could have multiple 60-day rollovers in a 12-month period if they had multiple IRAs. The new guidance now aggregates all IRAs for purposes of the 12-month period, meaning that an individual can only do one 60-day rollover in a 12-month period, regardless of the number of IRA accounts they hold. Trustee-to-trustee transfers are not affected by the ruling. This change will not impact many individuals, but it will certainly affect those that have become accustomed to using their IRAs for short-term loans.

Initially there was some level of hope that the IRS would reaffirm their 30-year position. However, such hope faded when they followed up with Announcement 2014-15, which postpones the Bobrow decision until January 1, 2015. The new rules apply to rollovers that take place after January 1, 2015.

If you have any questions, please contact Mark Flanagan of Aronson LLC’s Specialty Tax practice at 301.231.6257.

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The “Back Door” Roth IRA Contribution

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The Roth IRA presents a great opportunity to put money away for retirement and withdraw it all, free of tax. However, the ability to make such contributions is determinate on income. Many taxpayers find themselves unable to contribute to a Roth because their incomes are too high. As a result, such taxpayers are limited to contributing to a traditional, nondeductible IRA, which is far less tax-favorable than the Roth.

To address this, various articles have appeared describing what is called a “back door” Roth contribution – basically advising taxpayers to contribute to a traditional nondeductible IRA and then roll this contribution into a Roth, all tax-free. While the first part of this statement is true (you can contribute to a nondeductible IRA and then roll that into a Roth), the second part is often not true, resulting in a very nasty tax bite.

As an example, from 2004 thru 2013 a taxpayer contributed $5,000 per year to a nondeductible IRA. That IRA, along with other regular IRA accounts is now worth $1,000,000 and their basis in it is $50,000 (10 years’ worth of nondeductible contributions at $5,000 each). They decide to convert the current year’s $5,000 contribution to the Roth.

Many of the articles out there would lead you to believe, or even state directly, that the $5,000 conversion is tax-free. This is not the case at all. In fact, $4,750 of this conversion is taxable.

The crucial yet omitted information is that you cannot designate which dollars get converted. Saying “I’m just converting the portion that is basis” does not work. Every dollar in an IRA consists partly of basis and partly (in many cases, mostly) of tax-deferred growth. Therefore, if you have a fairly hefty IRA account, odds are that the majority of what you convert will be taxable.

Aronson LLC has represented countless clients in various tax controversy matters and we see this come up all too often because well-meaning articles do not tell the whole story. There is a way to structure this so that the conversion does end up being tax-free, but simply contributing to a traditional IRA and converting to a Roth is going to result in an unpleasant tax surprise.

For assistance with this issue or any other tax matters, please contact Aronson’s lead tax controversy partner Larry Rubin at 301.222.8212.

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