Weekly Tax Tip March 6, 2018

Weekly Tax Tip March 6, 2018

A client had a question the other day about taking an RMD from an inherited IRA. It was an
interesting question that perhaps some of you have encountered but weren’t sure how to
answer…the client wanted to know whether to take an RMD, or not take an RMD for the year of
death on behalf of the now deceased IRA owner.

As a reminder, the IRS does not allow you to leave assets in your traditional IRA forever, you must
begin taking required minimum distributions (RMD) after you turn 70½. You may delay your very
first RMD until April 1st of the year following the year you turn 70½.
For non-spouse beneficiaries of an IRA, if the IRA owner died prior to taking his/her RMD, that
beneficiary would take what’s commonly called a “year of death RMD” to avoid the 50% penalty for
failing to take an RMD on time.

What happened in this case? The IRA owner turned 70½ last summer. She did not take an RMD in
2017. She passed away a few weeks ago and had not taken any RMDs yet. Does this non-spouse
beneficiary now have to take a year of death RMD on her behalf because the owner turned 70½
last year?

The answer is NO. Why? Because under IRS rules, although the owner would have been required
to take her very first delayed RMD by April 1st and a regular 2018 RMD this year had she lived, she
passed away before her official required beginning date, April 1, 2018, so her non-spouse
beneficiary does not have to take a year of death RMD.


IRS Publication 590-B says:
“If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum
distribution is required because death occurred before the required beginning date.”
Source: IRS Publication 590-B for 2017 Returns

New Tax Law Seems Iminent

New Tax Law Seems Iminent

As the year is winding down, it begins to look like Congress and the Trump Administration will be passing tax legislation that appears to be both significant and far reaching.

It is important to stress that the bill has not yet passed and could likely either change or not pass at all.  That said, however, reports seem to indicate that passage is likely and most of the provisions seem to have been worked out.  With year end coming, we thought it might be helpful for purposes of planning to review a few of the most significant elements of the bill:

  1. Does This Bill Really Simplify Taxes –   It sure doesn’t appear that it will.  To be sure, there are elements of the bill that would make taxes more simple.  The bill has provisions that would eliminate the corporate alternative income tax.  This is important, because the alternative tax system is complex and frequently the source of many errors.  However, the alternative minimum tax for individuals would still remain.  Additionally, the bill in its current form, would eliminate the health care mandate, which can also be extremely complex.  However, there are several new provisions being added (see item 3 below), which would likely add complexity. We will have to wait for the final version of the bill to pass judgement on whether the provision will increase or decrease tax regulation, but the version being floated currently doesn’t seem to eliminate much.
  2. When Would the Tax Bill Take Effect – Almost all of the provisions of the tax bill would take effect on January 1, 2018.  That would mean that the the first tax return you would file that would implement the new changes would be the 2018 tax returns filed on or before April 15, 2019.  There would be very few changes for the current year (2017).
  3. Are There Changes to Pass-through Income – One of the most significant changes the bill currently contains is to reduce taxes on pass-through entities. Most business owners currently utilize a pass-through form of business (i.e. S Corporation, Partnership, LLC or Sole Proprietorship).  Currently the conference bill gives pass-through business owners a deduction (17.5%, 20% and 25% have been discussed) for pass-through income. There were previous discussions on possibly limiting that deduction over certain income thresholds and not allowing service businesses to use the deduction, but it is yet unclear if either of those provisions were kept. If the provision, or something like it holds, this would be the most significant development for business owners in a long time!
  4. Are There Changes to Corporate Tax Rates – Another significant provision of the bill would be to reduce corporate tax rates (currently taxed at 34%).  The new rate discussed has ranged from 20% to 21%.  Supporters of this provision believe that setting a rate for the multi-national corporations that is more competitive with European and Asian countries would bring more jobs and more economic activity to our shores.
  5. What About the Estate Tax – The estate tax would remain but the estate tax credit would be doubled.  That would mean that all estates below 10 million (20 million if you have planned properly) would not experience estate tax.
  6. Are My Taxes Going to Go Down –  Especially here in New Mexico, it is probably pretty likely that individual taxes are going to go down.  Unfortunately, the higher the income, the less likely you are to see much of a difference.  The highest individual rate currently is 39.6%.  The highest bracket under the new law will be 37%.  There will also be an increase to standard deductions, but decreases to some itemized deductions. In addition, the child tax credit was increased.

While the specifics of this bill may change before passing, it is clear that there won’t be much simplification. It is indeed good news that taxes in total will be declining.  However, there was also an element of this plan that was very troubling.  It would appear that this legislation will add even more to the ever growing federal debt.  One has to wonder when Washington will become committed to addressing the most pressing and troubling development of the last decade, the exploding federal debt.  Hopefully they will gain courage before it is too late!

As soon as the final legislation becomes available, we will be reviewing the specifics of the bill and helping our clients understand what will change in the coming year.

If you have any questions on how this legislation might impact you or just business questions in general, we are always happy to assist you.  Our initial consultations to new businesses are free.

Happy Holidays, Larry Filener

IRA Distributions

IRA Distributions


If you own an IRA or 401K account, there have been a number of court cases decided in the last few years that might be very important for your consideration.  One case in particular involved a life-long school district employee that had been working for a school system since her graduation from college.  When she was first employed she named her sister as her beneficiary on her pension plan.  The beneficiary declaration is often a simple one page document and filled out in a matter of minutes.  She went on to marry and have children.  She had a valid will drawn up that appointed her husband and family the beneficiaries of all she owned, including her pension proceeds.  HOWEVER, she did not ever change the original beneficiary statement that appointed her sister as her beneficiary.

At her death, the family had the unfortunate prospect of learning that the pension proceeds would go to the sister, not the family.  This was litigated clear to the supreme court who, in a 9-0 decision, upheld the payment of the proceeds to her sister (ultimately her sister’s estate).

TAKEAWAY:  Whether you have a 401K or an IRA, you need to be reviewing those beneficiary statements and making sure the person(s) that you want to receive your funds in the event of your death are correctly stated.  Even if you have a valid will, the beneficiary statement will control the payment of the funds.

Please don’t hesitate to contact us here at SWAP if you have any questions about your IRA or 401K account.  Our team of professionals can assist you with everything from pension design to planning IRA distributions.

Larry Filener, Owner  / Southwest Accounting Pros, LLC

Welcome to SWAP

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