Think Twice.. or Maybe Three Times Before Taking Money Out Of Your IRA
Are you thinking about taking money out of your IRA to pay off those bills that keep mounting up? If so, please call your Enrolled Agent first and be sure you understand how it is going to impact your taxes.
Each tax season, I end up sitting across from a client who hands me a 1099-R showing that they took an early distribution from their IRA. They start fidgeting as they wait to hear what their tax liability is going to be..... hoping beyond hope that they do not have a big tax bill this year.
An early distribution is when you take money out of your IRA before you have turned 59-1/2 years old. The impact of taking money out early is (1) you have to pay taxes on the distribution (2) you have to pay a 10% federal penalty and a 2.5% California penalty on top of the taxes (3) the distribution raises your adjusted gross income so that may push you into a higher tax bracket and you may phase out of deductions & credits you usually get, and (4) you no longer have retirement savings. (Wow... the government really doesn't want you to take an early distribution, do they!)
There are a handful (and we do mean just a few) circumstances where you can take money out of your IRA without paying the penalty. These circumstances include high medical bills, buying your first home or paying for college.
So, if you are thinking of taking money out of your IRA, call your Enrolled Agent first. We want to be sure you are fully informed and prepared for the tax impact of that distribution.
Cromwell Tax & Bookkeeping : Income Tax Preparation – Bookkeeping – Payroll – Fiduciary Accounting and other Accounting Services in Santa Rosa and throughout Sonoma County for over 30 years.
Saturday, March 7, 2015
Friday, January 30, 2015
This week's Tax Myths
This week's post focuses on common tax beliefs and what the real answer is.
Q: I worked for my neighbor and was paid cash under the table. Do I have to report that income?
A: All income is taxable unless Congress says it's not. So, even if you did not receive a W2 or 1099 or any other reporting document, that income is still reportable and taxable.
Q: I own some stocks and the dividends are automatically reinvested. I never received the cash so that is not income, right?
A: If those dividends are received in a taxable account (i.e. not an IRA or 401k) then you had "constructive receipt" of the income when it was reinvested thus it is taxable to you and must be reported on your tax return. Look for a form called 1099-DIV from your broker.
Q: I plan to file an extension this year. Does that mean I have until October 15th to save up for my tax bill?
A: An extension is just more time to FILE, it is not more time to pay. Thus you should make the most accurate estimate possible of your tax liability and get that paid by April 15th.
Q: We started a business. So, the next step is to become an LLC, right?
A: Your Enrolled Agent can walk you through all the tax implications of becoming an LLC, but you should also consult with an attorney to understand what legal protections you need and speak to an insurance agent to see if an insurance policy will give you the coverage you need (and the premiums may be less than the annual $800 LLC fee).
Q: Why should I pay an Enrolled Agent (professional tax preparer) to do my return? With online software, I just follow the wizard and I get my tax return completed for a fraction of the price.
A:While the commercials do a great job of making tax preparation look easy (and the Turbo Tax commercials are entertaining), there is so much more to it. Enrolled Agents help you identify deductions and credits you did not know about, they help you make tax-wise decisions for the future, and they help you avoid audit flags. Enrolled agents help you achieve the lowest legal tax liability possible so you spend your money on you and not on taxes.
This week's post focuses on common tax beliefs and what the real answer is.
Q: I worked for my neighbor and was paid cash under the table. Do I have to report that income?
A: All income is taxable unless Congress says it's not. So, even if you did not receive a W2 or 1099 or any other reporting document, that income is still reportable and taxable.
Q: I own some stocks and the dividends are automatically reinvested. I never received the cash so that is not income, right?
A: If those dividends are received in a taxable account (i.e. not an IRA or 401k) then you had "constructive receipt" of the income when it was reinvested thus it is taxable to you and must be reported on your tax return. Look for a form called 1099-DIV from your broker.
Q: I plan to file an extension this year. Does that mean I have until October 15th to save up for my tax bill?
A: An extension is just more time to FILE, it is not more time to pay. Thus you should make the most accurate estimate possible of your tax liability and get that paid by April 15th.
Q: We started a business. So, the next step is to become an LLC, right?
A: Your Enrolled Agent can walk you through all the tax implications of becoming an LLC, but you should also consult with an attorney to understand what legal protections you need and speak to an insurance agent to see if an insurance policy will give you the coverage you need (and the premiums may be less than the annual $800 LLC fee).
Q: Why should I pay an Enrolled Agent (professional tax preparer) to do my return? With online software, I just follow the wizard and I get my tax return completed for a fraction of the price.
A:While the commercials do a great job of making tax preparation look easy (and the Turbo Tax commercials are entertaining), there is so much more to it. Enrolled Agents help you identify deductions and credits you did not know about, they help you make tax-wise decisions for the future, and they help you avoid audit flags. Enrolled agents help you achieve the lowest legal tax liability possible so you spend your money on you and not on taxes.
Friday, January 23, 2015
Don't fall for the Scam
Have you received a call from "the IRS" telling you that you owe money and if you do not pay now, you will be arrested? If yes, you are not alone. The calls appear legitimate because the caller I.D. says IRS, and they know a lot of personal information about you. They are frightening because the callers are incredibly aggressive, will claim to put liens on your house, or will threaten to have you arrested if you do not pay immediately.
If you get a call like this:
Unfortunately, these callers are having success with the elderly and new immigrants and have stolen millions from people. So, if you know someone who may be vulnerable to this scam, please talk to them today and advise them to hang up on these con men.
What if the IRS legitimately needs to contact me?
If you do owe money, the IRS will send you letters and will give you a plethora of options for coming current. The IRS will never:
Have you received a call from "the IRS" telling you that you owe money and if you do not pay now, you will be arrested? If yes, you are not alone. The calls appear legitimate because the caller I.D. says IRS, and they know a lot of personal information about you. They are frightening because the callers are incredibly aggressive, will claim to put liens on your house, or will threaten to have you arrested if you do not pay immediately.
If you get a call like this:
- Immediately hang up. Do not engage with the caller. It is a scam.
- Next, report it:
- Call the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484 or at www.tigta.gov
- Contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.
Unfortunately, these callers are having success with the elderly and new immigrants and have stolen millions from people. So, if you know someone who may be vulnerable to this scam, please talk to them today and advise them to hang up on these con men.
What if the IRS legitimately needs to contact me?
If you do owe money, the IRS will send you letters and will give you a plethora of options for coming current. The IRS will never:
- Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.
- Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
- Require you to use a specific payment method for your taxes, such as a prepaid debit card.
- Ask for credit or debit card numbers over the phone.
- Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
Friday, December 19, 2014
Congress finally did something!
With just days before the end of the year, Congress finally passed a bill extending over 55 tax breaks for individuals and businesses. The key items that were extended until 12/31/14 are:
Individuals
529-ABLE plans
Within the Tax Extender bill, Congress also passed the ABLE Act (Achieving a Better Life Experience) which allows Section 529 plans (tax deferred savings accounts) to be created for disabled individuals. These accounts cannot be created until the Treasury writes the rules for them in 2015, so more will be shared about this in a later blog. But early indications are these will be very beneficial for families trying to pay for care for disabled individuals.
Be sure to speak to your Enrolled Agent to see how these items can benefit you personally.
With just days before the end of the year, Congress finally passed a bill extending over 55 tax breaks for individuals and businesses. The key items that were extended until 12/31/14 are:
Individuals
- Teacher's Credit ($250) - above the line deduction for teaching supplies
- Ability to exclude personal residence Cancellation of Debt Income (for foreclosures and short sales)
- Mortgage Insurance premiums (aka PMI) are deductible as mortgage interest
- Sales Tax is deductible (important for people in states without state income tax)
- Tuition Deduction
- Charitable contributions can count as RMDs from your IRA
- Multiple beneficial depreciation rules and limits
529-ABLE plans
Within the Tax Extender bill, Congress also passed the ABLE Act (Achieving a Better Life Experience) which allows Section 529 plans (tax deferred savings accounts) to be created for disabled individuals. These accounts cannot be created until the Treasury writes the rules for them in 2015, so more will be shared about this in a later blog. But early indications are these will be very beneficial for families trying to pay for care for disabled individuals.
Be sure to speak to your Enrolled Agent to see how these items can benefit you personally.
Thursday, November 20, 2014
How to Avoid the Penalty for not having Health Insurance
If you did not have health insurance in 2014, then you may have a higher tax bill when you file your tax return. This is because the Individual Mandate of the Affordable Care Act (ACA), also known as ObamaCare, requires individuals to have health insurance or pay a penalty.
The good news for the uninsured is that if you qualify for an exemption, you will avoid the penalty. The well-known exemptions are things like:
But, did you know that there are also hardship exemptions available? Some examples of the hardship exemptions include:
Go to the Health Care Exchange website to see the complete list of exemption possibilities.
Many of these exemptions need a certificate from the Exchange acknowledging your hardship as valid. So, if you think you qualify you should apply now to ensure you have the certificate in hand before April 15th. The Health Care Exchange website has all the details about applying for the exemption.
If you did not have health insurance in 2014, then you may have a higher tax bill when you file your tax return. This is because the Individual Mandate of the Affordable Care Act (ACA), also known as ObamaCare, requires individuals to have health insurance or pay a penalty.
The good news for the uninsured is that if you qualify for an exemption, you will avoid the penalty. The well-known exemptions are things like:
- You were uninsured for less than 3 months of the year
- You are a member of a religious sect with objections to insurance
- The cost is 8% or more of your household income
But, did you know that there are also hardship exemptions available? Some examples of the hardship exemptions include:
- You were homeless
- You were evicted in the past 6 months or were facing eviction or foreclosure
- You received a shut-off notice from a utility company
- You had medical expenses you couldn’t pay in the last 24 months that resulted in substantial debt
- You experienced the death of a close family member
Go to the Health Care Exchange website to see the complete list of exemption possibilities.
Many of these exemptions need a certificate from the Exchange acknowledging your hardship as valid. So, if you think you qualify you should apply now to ensure you have the certificate in hand before April 15th. The Health Care Exchange website has all the details about applying for the exemption.
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