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February 2016
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A Handful of Tips for Individuals with Retirement Plans

A Handful of Tips for Individuals with Retirement Plans Recent activity in the stock market probably gave a number of investors some discomfort in January 2016, if not outright nausea. People going online to get their 2015 fourth quarter or year-end retirement plan statements could not help but notice the change in account balances since December 31st. However, it is important to remember that retirement plan investing is a long-term proposition and the investor needs to refrain from making rash trading decisions. The purpose of this article is to take a look at a couple of retirement plan ideas that can help taxpayers.

If your client decides to do a rollover from a qualified retirement plan into an IRA, be sure to remind him to arrange for a “direct” (or “trustee-to-trustee”) rollover from the qualified retirement plan account into the rollover IRA. The check from the company retirement plan should be made out to the trustee of the client’s new rollover IRA. The other option would be to arrange for an electronic transfer directly into the rollover IRA. It is important that the rollover IRA account be set up in advance to receive the rollover contribution. No money needs to be in the IRA before the rollover. If your client receives a retirement plan distribution check payable to him personally, 20% of the taxable amount of the distribution will automatically be withheld for federal income taxes. The client will then have only 60 days to come up with the “missing 20%” and get an amount equal to the tax withheld into the rollover IRA. Otherwise, the client will owe income tax on the 20% withheld. In addition, the 10% premature-withdrawal penalty will generally apply if the client is under age 55 when he separates from service. There may also be state income tax ramifications.

You may also want to remind your clients to check who was listed as their beneficiary on their retirement plans. At the same time the client draws up or amends her will or living trust agreement, she should always check all retirement beneficiary designations. She should not depend upon wills or living trust documents to override outdated beneficiary designations. As a general rule, whoever is named on the most-recent beneficiary form (which might not be very recent) will get the money automatically if the client dies—regardless of what the will or living trust document might say.

A number of taxpayers are thinking about converting their traditional IRA accounts into Roth IRA accounts. There can be some long-term tax benefits for doing this conversion. Please keep in mind, however, that the taxpayer will usually owe tax on the resulting conversion. The money to pay this tax has to come from somewhere.

If money is siphoned away from the regular IRA before conversion to pay the tax, the 10% premature-withdrawal penalty tax will generally apply on top of the income tax liability. If the new Roth IRA is tapped to pay the conversion tax bill instead, the 10% premature-withdrawal penalty tax will still apply. Plus the Roth IRA balance is now that much smaller, meaning the account cannot earn as much tax-free income in the future. If the account owner borrows to pay the conversion tax, the true cost of converting is increased by the resulting interest charges (which are generally nondeductible). In effect, the interest charges are just another penalty on the transaction. For these reasons, it generally does not make sense to convert if the client does not already have the cash on hand to pay the conversion tax hit.

For those Baby Boomers who are still working but are over 70 1/2 years old, they can no longer make contributions to traditional IRAs. However, there is no age limitation on annual Roth IRA contributions. The taxpayer can contribute to a Roth IRA as long as she has the necessary earned income. Unlike contributions to traditional IRAs, eligibility to make annual Roth contributions is unaffected by the taxpayer’s participation (or her spouse’s participation) in a tax-favored retirement plan. If the IRA owner is age 50 or older at the end of the year, she is able to contribute up to an additional $1,000 for a total maximum contribution of $6,500. There is an income restriction or phase-out on annual Roth IRA contributions depending upon modified adjusted gross income and filing status.

By April 1st of the year after a traditional IRA owner turns 70 1/2, he must take his first required minimum withdrawal. If he turned 70 1/2 in 2015 and did not take the initial minimum withdrawal in 2015, there is still time to take the required minimum withdrawal before April 1, 2016. However, the clock is ticking. In addition, the required minimum withdrawal for 2016 will need to be taken before December 31, 2016.

It is usually best to take the initial required minimum distribution in the year that the taxpayer turns 70 1/2 in order to avoid the resulting double dip of income tax. Clients who want to get the most tax-savings mileage out of their retirement accounts should take their annual minimum withdrawal amounts but no more than that. Please remember that the original IRA Roth owner who is 70 1/2 and older is not required to make minimum withdrawals from his Roth IRA.

The solo 401(k) plan is ideal for the one-person small business operator whose objective is to maximize their deductible pay-ins into their tax-deferred retirement account. With a solo 401(k) plan, annual deductible contributions to the owner's account are composed of two different parts.

Part 1: For 2016, up to $18,000 of the owner's corporate salary or self-employment income can generally be contributed to her account. If the owner will be age 50 or older at year-end, the contribution maximum rises to $24,000 because an extra $6,000 “catch-up” contribution is allowed. This first part is considered to be an elective deferral contribution made by the owner. In the case of a corporate solo 401(k) plan, the elective deferral contribution is funded with salary reduction amounts withheld from the owner's paychecks and contributed to the owner's account. In the case of a solo 401(k) set up for a sole proprietorship or single-member LLC, the owner simply pays the elective deferral contribution amount into her account.

Part 2: On top of the elective deferral contribution, the solo 401(k) arrangement permits an additional contribution of up to 25% of the owner's corporate salary, or 20% of the owner's self-employment income. Self-employment income is defined as the owner's Schedule C, E, or F net income reduced by the above-the-line deduction for 50% of self-employment tax. This second pay-in is considered to be an employer contribution. With a corporate plan, the corporation makes the employer contribution on the owner's behalf. With a plan set up for a sole proprietorship or single-member LLC, the owner is treated as her own employer. Therefore, the owner makes the employer contribution on her own behalf.

When the owner is under age 50, the solo 401(k) dollar cap on combined elective deferral and employer contributions is $53,000 for 2016. When the owner is 50 or older, the dollar cap for 2016 is $59,000 ($53,000 + $6,000 additional catch-up contribution). That is a good piece of change to set aside for retirement. In addition, both the business and the owner receive tax benefits. In no event, however, can the combined elective deferral and employer contributions exceed 100% of the owner's corporate salary or self-employment income.

These are just a few ideas or reminders to keep in mind regarding your retirement plans or your client's retirement plans. By far, this is not a complete list, and it barely scratches the surface. There are a number of publications and CPE courses that delve into this topic in much greater depth. I encourage you to seek these other sources and expand your knowledge in this area. It will benefit both you and your client.

For more information, see Checkpoint Learning’s online course, Tax Planning for Retirement Wealth.
State & Local Tax Jurisdictions Address Media Streaming and Cloud Services

State & Local Tax Jurisdictions Address Media Streaming and Cloud Services Charles R. Goulding and Michael Wilshere discuss the tax treatment of electronic transmissions.

Netflix and other purely electronic transmission services have become a large part of U.S. entertainment consumption. Recently, states are beginning to contemplate how these services (or perhaps goods, depending on how you classify them) should fit within their sales tax regimes. Sales of CD’s, DVD’s, video games and packaged software have been declining for years as consumers are increasingly streaming comparable services directly from the internet. The average inflation-adjusted sales tax revenue growth rate nationwide between 2004 and 2014 was about 1.5%. That figure is down significantly from the 3.1% rate seen a decade earlier. This disparity can be largely attributed to the revenue lost from declining physical media sales. National yearly spending on DVD and Blue-ray discs alone has fallen at least 50% from over $20.2 billion less than a decade ago to about $10 billion currently. This has resulted in a loss of hundreds of millions of tax receipts for state and local governments.

In order to make up for the lost revenue, state and local governments are looking to a broad array of new digital products that have, for the most part, previously gone untaxed. Those products include cloud computing, streaming, and other e-commerce transactions.

States have been taxing tangible goods for a long time, however new digital products do not fit seamlessly into the established regulatory framework that provides statutory authority. Nonetheless, some states have applied electronic transmission taxes through creative interpretation while others have rewritten entirely new tax law. Some have taken a hybrid approach by extending the definition of services and tangible personal property in statutes, regulations, and administrative guidance to include digital products.

In Tennessee, consumers pay as much as a 7% tax on software and digital games. In Chicago, city residents pay an extra 9% tax to use services such as Netflix and Spotify. Florida exempts digital goods from taxation, however, has an expansive communication services tax that encompasses a range of telecommunication and audiovisual services transmitted by any medium.

What these states end up with is a patchwork of complex regulation developed over the span of multiple decades or even centuries. Meanwhile, the technology keeps evolving at a pace that many legal systems are not keeping up with.

Some states have explored the issue in painstaking detail only to decide not to tax electronic transmissions at all. California applies sales tax only to tangible personal property, excluding digital products. Alabama recently put its version of the “digital transmissions tax” on hold by writing to the Commissioner of the Department of Revenue stating, “We have [The Alabama Legislature] received concerns from several members of the legislature and other interested parties that the amendments [to the Alabama Administrative Code allowing rental taxes to apply to digital transmissions] may be overly expansive and may also be considered a new tax in which case the Alabama Legislature would be the proper governmental body from which to make such a determination or enactment.” (Alabama House of Representatives, e-mail to the State Department of Revenue, April 7, 2015)

Missouri and Virginia thought the courts were the appropriate governing body leaving their ruling in force which held that streaming video content is not subject to sales tax or communications services tax. Vermont recently abandoned their bid to levy a tax on cloud computing because the legislature concluded it was more akin to a service than a tangible good. Idaho has taken a somewhat similar position exempting cloud-based software sales and downloadable software.

These varying positions breed much uncertainty over what the actual law is in any given jurisdiction. Already, Kentucky and Louisiana are entangled in litigation with Netflix over the issue. More litigation will inevitably follow. One thing however is clear—digital electronics are here to stay. How and when each local tax system will respond is anybody’s guess.
Tax Strategies for Clients During their Golden Years

Tax Strategies for Clients During their Golden Years Clients who are retired or nearing retirement will worry that they have not saved enough for retirement necessitating a lifestyle change or relying on their children for support. Trusted tax advisors have the opportunity to become valuable assets to their aging clients by employing various tax-advantaged strategies.

Social Security Retirement Benefits. Social Security benefits may be completely tax-free or partially tax-free, depending on total income. Up to 85% of Social Security benefits may be taxable if the taxpayers’ provisional income exceeds base amounts. However, steps can be taken to minimize taxes, such as:
  • timing some types of income, moving from one tax year to another,
  • increasing pretax IRA and 401(k) contributions,
  • investing in growth stocks or mutual funds instead of dividend-paying stocks or fixed income securities, and
  • converting traditional IRAs to Roth IRAs before receiving Social Security Benefits.
Early Distributions from Retirement Plans. Taxpayers who take early distributions from their retirement plans may be subject to the early distribution penalty, generally 10% of the taxable amount of the unexempted distribution. There are various exemptions from the tax, but be aware that all exemptions do not apply to all plans or IRAs. A few of the available exemptions are listed below:
  • distributions made on or after the employee or account owner's death,
  • distributions attributable to the employee or account owner becoming disabled,
  • part of a series of substantially equal payments for the life of the employee or account owner or the joint lives of the individual and a designated beneficiary,
  • qualified plan distributions made to an employee after separation from service after reaching age 55 or paid to an alternate payee pursuant to a qualified domestic relations order, and
  • IRA distributions that are distributions to the extent of the individual's deductible medical insurance, for first-time homebuyers, or used to pay higher education expenses.
Minimum Required Distributions. Many retirees delay distributions from retirement plans as long as possible to delay the taxation of the benefits. However, the minimum required distribution (MRD) rules were created to prevent the continual postponement of tax due on funds held in retirement accounts. The following strategies will help minimize taxes:
  • start distributions in the year the taxpayer turns age 70 ½ to avoid receiving two minimum distributions in one year and
  • making an IRA distribution to a charitable entity.
Lump-sum Distributions. In general, the taxable portion of a lump-sum distribution from a qualified plan is fully taxable as ordinary income in the year received and may also be subject to the 10% early distribution tax if the individual is under age 59 ½. However, a participant receiving a lump-sum distribution from a qualified plan may be eligible for the following favorable tax treatments on the distributions by:
  • rolling over the LSD into an eligible retirement plan to defer taxes and
  • electing favorable tax treatment for certain LSDs (1) depending on when the individual participated in the plan, a portion of the distribution may be treated as long-term capital gain or (2) the participant may be able to make a favorable 10-year averaging election.
Although this article focused on tax-advantaged strategies, asset repositioning strategies and cash management strategies may be explored to assist your aging clients.

For more information, see Checkpoint Learning’s course, Tax Strategies for Clients During their Golden Years.
Providing Joint Employer Tax Planning Advice

Providing Joint Employer Tax Planning Advice Charles R. Goulding and Michael Wilshere provide tax planning advice for employers in light of recent National Labor Relations Board decision.

On August 27, 2015, the National Labor Relations Board (NLRB) handed down a landmark decision that could have real consequences for subcontractors and potentially franchises and industries that are engaged in joint businesses. The decision, which was the product of a 3-2 vote involving sanitation workers, revised the “joint employer” standard for determining when one company shares legal responsibility for employees hired by another.

The case involved whether Silicon Valley recycling plant, Browning-Ferris Industries, should legally be considered the employer of workers supplied by sub-contractor, Leadpoint Business Services. Browning-Ferris paid Leadpoint to sort recycling materials. Leadpoint employees separated paper from plastic and glass on conveyor belts which were owned by Browning-Ferris and run by Browning-Ferris employees. Leadpoint determined its workers’ salaries and decided whom they should hire, fire, and promote, or demote. Browning-Ferris simply decided what hours they would run their plant and which lines they would run each day. On one occasion, Browning-Ferris caught a Leadpoint employee drinking whiskey on the job and asked for his termination. The NLRB decided that this constituted enough “indirect” control to legally classify Browning-Ferris as a co-employer of Leadpoint’s workers, meaning Browning-Ferris would be liable for overtime pay, taxes, and benefits whenever they are mandated for employees.

Before the decision, one business couldn’t be held liable for employment related matters at another unless they had direct control over the employees in question. The new “joint employer” test, however, means that the NLRB could hold businesses responsible for employment policies even if they only exercise indirect control over such employees. That means employers may be responsible for workers’ rights even if they don’t contract directly with them. This could have big implications for franchise restaurants and companies who use staffing firms as a labor source. These staffing firms help the economy run more efficiently by allowing companies to focus on their core specialties while delegating tangential services to sub-contractors. If the ruling stands however, both entities will become co-employers of the contract workers. That means an additional level of oversight by the end user company along with a basket of added complexities could become commonplace in each contracting arrangement.

Now, a union representing workers will be legally entitled to bargain with not only the sub-contractor but also the end user of the labor. Attorney Marshall B. Babson who helped write a brief for the U.S. Chamber of Commerce opposing the rule had this to say: “The decision today could be one of the more significant by the N.L.R.B. in the last 35 years. Depending on how the board applies its new ‘indirect test,’ it will likely ensnare an ever-widening circle of employers and bargaining relationships.” Board officials announced as part of the ruling that they would consider the indirect control inquiry on a case by case basis.

The 3-2 decision that was handed down on August 27, 2015 was split along party lines. The three Democrats cited in their decision a “dramatic growth in contingent employment relationships” that “potentially undermines the core protections of the act for the employees impacted by these economic changes.” The two dissenting republicans voiced their concern saying: “The result is a new test that confuses the definition of a joint employer and will predictably produce broad based instability in bargaining relationships.”

In view of the NLRB decision, planning taxpayers involved in large subcontractor relationships should consider the following risk minimization techniques: First, determine whether your subcontractor is itself functioning as a first tier subcontractor. For all U.S. subcontractors in your supply chain obtain verification that all workers:
  1. Are subject to payroll tax withholding
  2. Have medical insurance
  3. Are covered by workers compensation
  4. Comply with current and scheduled federal, state and local minimum wage requirements
Taxpayers should instruct their purchasing departments to establish procedures insuring that all vendors are informed of these requirements and create appropriate verification processes.
Leaders from Industry and Government Collaborate to Address Tax Return Identity Fraud

Leaders from Industry and Government Collaborate to Address Tax Return Identity Fraud The IRS has taken notice of the epidemic of tax return identity fraud. In fact, the IRS Commissioner gathered leaders in the public and private sectors to meet and work collaboratively to protect taxpayers from identity tax refund fraud in the 2015 Security Summit which resulted in the formation of the Security Summit Initiative.

The initiative includes leveraging the collective resources of chief executive officers of the leading tax preparation firms, software developers, payroll and tax financial product processors, and state tax administrators to discuss the common challenges and develop ways to harness new and innovative safeguards to protect taxpayers in time for the 2016 filing season.

This collaboration between industry and government has the potential to be successful like no individual governmental agency. As part of the initiative, the federal and state governments, as well as private industry contributors, have all agreed to strengthen safeguards at their respective levels of engagement and share data with each other so they can make more intelligent decisions about tax fraud prevention strategies.

The structure of the Security Summit included representatives from the Federation of Tax Administrators (FTA), the Council for Electronic Revenue Communication and Advancement (CERCA) as well as the American Coalition for Taxpayer Rights (ACTR).

The FTA was originally organized to improve the quality of state tax administration by providing services to state tax authorities and administrators including research and information exchange, training and intergovernmental and interstate coordination. The FTA also represents the interests of state tax administrators before federal policymakers where appropriate.

CERCA participated as a forum and a liaison between the IRS and the tax software industry. CERCA's board members include a number of key industry players including Drake Software, Tax Products Group, Intuit, H&R Block, ADP,, Jackson Hewitt, Liberty Tax Service, Petz Enterprises, River City Bank, TaxSlayer, Thomson Reuters, and Wolters Kluwer.

The ACTR acts as an advocate for policies to protect taxpayers and the voluntary income tax compliance system. Members of ACTR include CCH Small Firm Services, H&R Block, Intuit, Jackson Hewitt, Liberty Tax Service, Refund Advantage, Republic Bank & Trust Co., Tax Products Group, TaxSlayer and TaxAct.

Three working groups were established which were tasked with addressing concerns regarding authentication, information sharing and the development of a proactive solution to identity theft and tax return fraud.

The authentication working group was tasked with identifying opportunities for strengthening authentication practices, including identifying new ways to validate taxpayers and tax return information, and new techniques for detecting and preventing identity tax refund fraud.

The information sharing working group agreed to work on identifying opportunities for sharing information that would improve our collective capabilities for detecting and preventing IDT refund fraud.

The working group tasked with the development of proactive initiatives and solutions to combat this crime is referred to as Strategic Threat Assessment and Response (STAR). Specifically, the STAR team’s objective was to take a holistic look at the entire tax ecosystem, identify points of vulnerability (threats/risks) related to the detection and prevention of IDT refund fraud, develop a strategy to mitigate or prevent these risks and threats, and review best practices and frameworks used in other industries.

The recommendations made by these working groups fell into the following categories:
  • Pre-refund authentication and identity tax refund fraud detection
  • Post-filing analytics to detect and prevent identity tax refund fraud
  • Tax ecosystem refund fraud information sharing and assessment center (ISAC)
  • Framework for improving critical infrastructure cybersecurity
  • Identity proofing and trusted source authentication
  • Taxpayer awareness, outreach and education
In June of 2015, these details were outlined in a Summit Report. The go-forward plan was:

The public-private partnership has begun the planning for implementing the agreed-upon recommendations, including the necessary programming modifications, outreach and communications, with the intent of having these IDT refund fraud detection and prevention solutions ready for the 2016 filing season and beyond.

The public-private partnership also agreed that the IRS, States and Industry must continue to work together diligently to be nimble and adaptive, and to communicate and share information broadly to stop IDT refund fraud schemes as they are developing and prevent them from spreading across the tax ecosystem. Issues such as identity proofing and authentication are recognized as never-ending challenges that compel further collaboration among Summit participants, since identity thieves have proven to be resourceful and creative in compromising even the best multi-layered controls designed to protect against infiltration. As described above, the Summit participants identified multiple issues warranting further partnership in the months and years ahead, and have enthusiastically committed to continue to tackle these issues together as a group.

For more information, see Checkpoint Learning’s course, Tax Refund Fraud Perpetrated by Identity Theft.
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Heard about the latest tax developments? Managing Director Joe Harpaz is a regular contributor on Forbes. Explore his timely discussion around policy proposals and changes, breaking down complex issues. Find the blog hosted on Forbes at
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