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The Required Minimum Distribution Puzzle

Many people have accumulated significant balances in tax deferred retirement accounts during their working years. In addition, they may have accumulated significant additional assets and, therefore, do not currently need withdrawals from their tax deferred accounts. Nonetheless, U.S. tax law requires distributions from these accounts beginning at age 70 1/2, whether or not the funds are needed.

There are many rules that can trip up the unwary and subject account holders to penalties if distributions are not taken in a timely manner. Smart planning for these distributions may result in tax efficient strategies to minimize the tax bite.

What is a Required Minimum Distribution?

A Required Minimum Distribution (RMD) is generally the minimum amount that must be withdrawn from your retirement plans each year once you reach age 70 1/2.

These rules apply to traditional IRAs, SEP IRAs, Simple IRAs, SARSEPs, and employer-sponsored plans including 401(k)s, 403(b)s and 457 plans. RMDs are not required for Roth IRAs while the account owner is living, but they do have to be taken from Roth 401(k)’s. By rolling over your Roth 401(k) to a Roth IRA you could avoid the need to take the RMD since Roth IRA’s are not subject to the minimum distribution rules while the account owner is living.

When must the RMDs begin?

Distributions typically begin in the year the account owner turns 70 1/2. However, the first distribution may be delayed until April 1 of the calendar year following the later of:

1. The year the plan owner turns 70 1/2, or
2. The calendar year the employee retires.

If the plan is an IRA or if the account owner is at least a 5% owner of a business, distributions must begin by April 1 of the year after the account holder is 70 1/2, even if the owner is still working.

Delaying the first payment until April 1 of the year after the owner turns 70 1/2 will require two distributions in that calendar year. The first distribution will pertain to the prior year when the recipient attains age 70 1/2, and the second distribution will be the normal annual distribution. As a result of taking two distributions in one year, this delay may bump plan owners into a higher tax bracket; therefore, depending on earnings, it may make sense to take the first distribution in the year the account owner turns 70 1/2. Be sure to consult your tax advisor to assist with this decision.

How is the RMD calculated?

The account balance is typically paid to the account owner over the life expectancy of the participant according to tables provided by the IRS. The RMD must be taken every year and it is up to the account owner to be sure the correct amount is withdrawn. The distribution is determined based on the balance in the account at December 31 of the prior year. This balance is then divided by life expectancy to determine the RMD, which must be taken by December 31 of the current year.

Illustration:

Age of account owner on December 31, 2018: 70 1/2
Account balance on December 31, 2018: $100,000
Life Expectancy per IRS Table: 27.4
2019 RMD: $3,650

The RMD must be calculated separately for each IRA; however, the total can be withdrawn from one or more IRAs.

Taxation of RMDs

Distributions may be partly taxable or fully taxable as ordinary income in the year received depending on whether there were nondeductible contributions made to the account. (Nondeductible contributions to IRA’s give you basis in the account and are tracked on Form 8606).
If all contributions were deducted in the years they were made then the entire distribution will be taxable. If non-deductible contributions were made then a pro rata portion of each distribution represents a return of basis and is tax-free.

TAX PLANNING OPPORTUNITIES

Qualified Charitable Distributions

If the IRA owner is age 70 ½ or older, a distribution of up to $100,000 can be directed each year to a charity, and the amount will not be included in taxable income. These types of distributions can be used to satisfy part or all of the RMD for the year. The contribution will not be allowable as an itemized deduction, since it is not included in income. (This may be moot, since many individuals are not eligible to itemize deductions as a result of the changes implemented by the Tax Cuts and Jobs Act).

In addition, since the charitable distribution is not included in taxable income, certain deductions and credits based on income will not be impacted. For example, the amount of taxable social security benefits, the cost of Medicare benefits, or state income tax when it is calculated based on adjusted gross income would not be impacted when a distribution is not included in income.
The distribution must be made by the trustee of the IRA to the charity by December 31. The trustee should issue the check directly to the charity, if possible. These types of distributions cannot be made to donor advised funds, private foundations, or supporting organizations.

Roth Conversion

RMDs are not required for Roth IRAs while the account owner is living. Therefore, in certain circumstances it may make sense to convert part or all of a traditional IRA to a Roth IRA so that RMDs will not be required. This strategy could be employed in the years following retirement but prior to reaching age 70 1/2. There are many things to be considered before converting to a Roth, since there will be taxable income in each year of the conversion. However, there may be other deductions that could offset the taxable income such as alimony payments or a large charitable contribution of appreciated property. In addition, the impact of Medicare premiums should be considered.

Putting the RMD Puzzle Together

There are a variety of considerations with respect to RMDs, such as:
 The year the RMDs should begin;
 Calculating the amount of the RMD;
 Impact on taxable income;
 Basis in the IRA;
 The feasibility of Roth conversion; and
 Qualified donations to charity.

For questions or assistance in computing or determining whether to take a minimum distribution, contact us.

New Jersey Tax Amnesty Program

The New Jersey Tax Amnesty Program will begin on November 15, 2018 and end on January 15, 2019. Tax amnesty is only available for State tax liabilities for tax returns due on or after February 1, 2009, and before September 1, 2017.

No Penalty and Reduced Interest
The program offers a waiver of most penalties, Referral Cost Recovery Fees, or cost of collection fees and one-half of the balance of the interest that remains due as of November 1, 2018. Civil fraud penalties and criminal penalties will not be waived.

In order to receive tax amnesty, a taxpayer must pay the outstanding tax due and remaining one-half of the related interest by the end of the amnesty period. In addition, the taxpayer must file all delinquent returns. Payments made through amnesty are not eligible for refund or credit. Taxpayers participating in amnesty will no longer have the right to appeal the amount paid.

Eligibility
Most taxpayers with an outstanding New Jersey tax liability for any tax return due on or after February 1, 2009, and before September 1, 2017, are eligible for tax amnesty.
•A taxpayer who has filed an administrative or judicial appeal related to a tax assessment may request tax amnesty, but it will only be granted with the Director’s approval.
•A taxpayer who has been notified by the Office of Criminal Investigation in the Division of Taxation that he or she is under criminal investigation for a State tax matter, or a taxpayer who has been charged with a State tax matter (as certified by a county prosecutor or the Attorney General) is not eligible for tax amnesty unless the Office of Criminal Investigation certifies to the Director that the State tax matter involving that person was resolved.
•A taxpayer is not eligible for tax amnesty for a tax that is not administered and collected by the Division.

Post Amnesty Penalty
If a taxpayer is eligible for, but chooses not to take advantage of tax amnesty, an additional 5% penalty, which the Division cannot waive or abate, will be imposed on any eligible amount not resolved during the amnesty period.

Filing for Tax Amnesty
Visit the New Jersey Tax Amnesty website https://taxamnesty.nj.gov/ and click “File for Amnesty”
to view your outstanding liability In order to obtain tax amnesty, you must:

•File all required tax returns electronically, if available;
•Make full payment for amnesty eligible taxes, plus one-half of the balance of interest due electronically; and
•Acknowledge the payment/waiver statement before January 15, 2019, the end of the Tax Amnesty period.

If your tax returns cannot be filed electronically, you can still make full payment and acknowledge the payment/waiver statement online. Mail paper tax returns to:

New Jersey Division of Taxation
Tax Amnesty
50 Barrack Street
PO Box 286
Trenton, NJ 08695-0286

All filings delivered by mail must be postmarked by midnight on January 15, 2019, or delivered to the Division of Taxation by the close of business on January 15, 2019.

For additional information about the Tax Amnesty Program, including regulations related to implementation of the program, please contact us or you may visit the New Jersey Tax Amnesty website or call the Tax Amnesty Hotline 1-800-781-8407.

Meals Continue to be Deductible Under New Guidance

The IRS on Wednesday issued guidance clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the tax law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (Notice 2018-76). According to the IRS, the amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but do not address the deductibility of expenses for business meals. This omission has created a lot of confusion in the business community, which the IRS is addressing in this interim guidance. Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.

Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  • The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
  • The expense is not lavish or extravagant under the circumstances;
  • The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
  • The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  • For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

The IRS will not allow the entertainment disallowance rule to be circumvented through inflating the amount charged for food and beverages.

The notice contains three examples illustrating how the IRS intends to interpret these rules. All three examples involve attending a sporting event with a business client and having food and drink while attending the game. The examples follow the AICPA’s recommendation that meal expenses be deductible when their costs are separately stated from the cost of the entertainment.

The IRS plans to issue proposed regulations and is requesting comments by Dec. 2 on the notice. It is also asking for comments on:

  • Whether further guidance is needed to clarify the interaction of Sec. 274(a)(1)(A) entertainment expenses and business meal expenses.
  • Whether the definition of entertainment in Regs. Sec. 1.274-2(b)(1)(i) should be retained and, if so, whether it should be revised.
  • Whether the objective test in Regs. Sec. 1.274-2(b)(1)(ii) should be retained and, if so, whether it should be revised.
  • Whether the IRS should provide more examples in the regulations.

New Jersey Sales Tax on Rental of Transient Accommodations beginning October 1st, 2018

New Jersey Governor Phil Murphy has signed a bill into law that imposes the same lodging taxes on short-term rentals that hotels and motels pay. As of October 1, 2018, a new law imposes Sales Tax, the State Occupancy Fee, and the Meadowlands Regional Hotel Use Assessment on charges associated with the rental of transient accommodations. The change means operators of short-term rentals that are booked through companies such as Airbnb, VRBO, HomeAway, or others are now required to add these taxes to guests’ bills and remit them to the state. Rentals that are for a period of 90 consecutive days (permanent resident exemption) are excluded from the tax.

“Transient accommodation” means a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences. This definition includes rentals made through “transient space marketplaces” as well as rentals that are made directly by the homeowner through classified listing sites, local newspaper ads, referrals from friends/family, or placing a sign on the home, etc.

However, it does not include:

1) a hotel or hotel room;
2) a room, group of rooms, or other living or sleeping space used as a place of assembly;
3) a dormitory or other similar residential facility of an elementary or secondary school or a college or university;
4) a hospital, nursing home, or other similar residential facility of a provider of services for the care, support and treatment of individuals that is licensed by the state;
5) a campsite, cabin, lean-to, or other similar residential facility of a campground or an adult or youth camp;
6) a furnished or unfurnished private residential property (i.e., condominiums, bungalows, single-family homes and similar living units) where no common hotel services are made available (i.e., maid, room, or linen changing services) and where the keys to the property, whether a physical key, access to a keyless lockingmechanism, or other means of physical ingress, are provided at the location of an offsite licensed real estate broker; or
7) leases of real property with a term of at least 90 consecutive days.

“Residence” means a house, condominium, or other residential dwelling unit in a building or structure that is designed, constructed, leased, rented, let or hired out, or otherwise made available for use as a residence.

Beginning October 1, short-term rentals will be subject to the state’s 6.625 percent sales tax and 5 percent hotel occupancy fee, although the occupancy fee is lower in cities that have their own municipal tax on accommodations. That includes Atlantic City, Jersey City, and Newark, where the state fee is 1 percent, and the Wildwoods, where it’s 3.15 percent.

Many municipalities in New Jersey also levy their own municipal occupancy taxes on hotels. The new law allows municipalities the option to impose new taxes and fees on short-term rentals, including: hotel occupancy fee, Atlantic City luxury tax, Atlantic City promotion fee, Cape May County tourism sales tax, Cape May County tourism assessment, sports and entertainment facility tax, and Meadowlands regional hotel use assessment.

Short-term rental operators must register with the state for tax purposes before they can start collecting lodging taxes from guests. All other New Jersey short-term rental hosts will be responsible for registering for a tax ID number, collecting all lodging taxes from guests, filing lodging tax returns, and remitting collected taxes.

Philadelphia Wage Tax Reduced Beginning July 1

The City of Philadelphia will reduce its Wage Tax rate starting July 1, 2018. The rate change has an immediate impact on all businesses that operate in the city, or that hire Philadelphia residents. The new rates are:

  • 3.8809% (.038809) for residents of Philadelphia
  • 3.4567% (.034567) for non-residents

All paychecks issued by businesses with a pay date after June 30, 2018 must have Philadelphia City Wage Tax withheld at the new rates.

Likewise, the City has lowered its Earnings Tax rate starting to July 1, 2018. The new Earnings Tax rates are 3.8809% (.038809) for residents and 3.4567% (.034567) for non-residents.

The Earnings Tax is essentially the same as the Wage Tax. The main difference is how the tax is collected and paid to the City of Philadelphia. The Wage Tax is collected from an employee’s paycheck and paid to the City by an employer. When your employer does not collect the Wage Tax on your behalf, you pay Earnings Tax directly to the City.

Philadelphia’s Net Profits Tax (NPT) and School Income Tax (SIT), which mirror the Wage Tax, will also decrease.  For Tax Year 2018, the new NPT rates are 3.8809% (.038809) for residents and 3.4567% (.034567) for non-residents. For Tax Year 2018, the new SIT rate for residents is 3.8809% (.038809). Only residents of Philadelphia are liable for SIT.

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