Common Mistakes to Jeopardize Retirement Accounts

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1 Common Mistakes to Jeopardize Retirement Accounts Presented by: Angela H. Wong, CPA 4966 El Camino Real, Suite 205 Los Altos, California, Materials covered in this presentation are not intended for tax advise or tax planning purposes. Federal tax rules are complex and there are often exceptions; please consult your tax advisor for your particular situations. 1

2 Mistake 1 Notes: 2

3 Mistake 2 Leaving 401(k) behind after change of employment. Notes: 3

4 Mistake 3 Placing IRAs in a trust absent any good reasons. Notes: 4

5 Mistake 4 Failure to take required minimum distributions (RMD) 50% missed RMD penalty Example: You reach 70 ½ in The first RMD must be made by April 1 of Subsequent RMD after the required beginning date (RBD) must be made by December 31, Notes: 5

6 RMD Calculation Example Prior year-end account balance / life expectancy = RMD IRA account owner ago 80 with prior year-end account balance $300,000 RMD = $16,043 ($300,000/18.7) Notes: 6

7 RMD Example - Inherited IRA Inherited IRA: 42 year old son RMD $7,194 ($300,000/41.7) 3 year old grandchild RMD $3,764 ($300,000/79.7) Notes: 7

8 Mistake 5 Lack of distribution plans to lose bulk of IRA accumulation to heavy and unnecessary taxation. Notes: 8

9 Multi-generational IRAs Primary beneficiary Secondary beneficiary Tertiary beneficiary 9

10 Mistake 6 Choosing the wrong IRA custodian IRA custodians can be a bank, mutual fund company or insurance company. Custodian rules cover two board aspects: IRS compliance and administrative rules. When you sign the custodian agreement you give permission for your IRAs to be managed by the rules set up by the custodian. Notes: 10

11 New Taxes 2013 and 2014 Looking Forward Presented by: Angela H. Wong, CPA 4966 El Camino Real, Suite 205 Los Altos, California, Materials covered in this presentation are not intended for tax advise or tax planning purposes. Federal tax rules are complex and there are often exceptions; please consult your tax advisor for your particular situations. 11

12 Five Affordable Care Act Taxes Additional Medicare Tax on Earned Income Net Investment Income Tax Increased Threshold for Medical Expenses Limit on Flexible Spending Account Contribution Medical Device Tax 12

13 Additional Medicare Tax on Earned Income 0.9% additional Medicare tax applies to wages and net self-employment income beginning in Applies to earned income over $200,000 for single, head-of-household, or surviving spouse, $250,000 for married filing jointly, $125,000 for married filing separately. Applicable thresholds are not adjusted for inflation. Applies to employee s share of earned income and does not apply to employer s employment taxes. Employers are required to apply the additional withholding at $200,000 of compensations. 13

14 Additional Medicare Tax on Earned Income Example 1 (possible under withholding): Husband s W-2 Medicare wages $185,000 Wife s W-2 Medicare wages $115,000 No additional withholding but still owe additional Medicare tax of $450 ($185,000 + $115,000 - $250,000) x 0.9% Example 2 (possible over withholding): Husband s W-2 Medicare wages $35,000 Wife s W-2 Medicare wages $210,000 The employer of the wife is required to withhold an additional 0.9% additional Medicare tax of ($90) on the $10,000 taxable wages over the $200,000 threshold. Maximizing contributions to a qualified retirement plan such as 401(k) or a 403(b) would not impact the Additional Medicare Tax calculation although it does reduce box 1 Wages, tips & other compensation for federal income tax withholding purposes. However it does impact estimated taxes. 14

15 Net Investment Income Tax (NIIT) A new tax imposed on individual and estate and trust beginning 2013 Tax is 3.8 % imposed on The lessor of: a. An individual s net investment income for the tax year, or b. Any excess of modified adjusted gross income (MAGI) for the tax year over a threshold amount. Threshold amount is $200,000 for single taxpayers and heads-of-households; $250,000 for married filing jointly and surviving spouses; $125,000 for married filing separately. 15

16 Net Investment Income Tax (NIIT) What is net investment income? Example: a. Gross income from interest, dividends, annuities, royalties, and rents. b. Other gross income from any passive trade or business. c. Net gain from the disposition of property from passive activities. 16

17 Net Investment Income Tax (NIIT) Strategies: Reduce modified adjusted gross income Implement timing strategies Examples: a. Make retirement plan contributions b. Purchase tax-exempt bonds c. Transfer interests in pass-through entities to family members d. Installment sales 17

18 Increased Medical Expenses Threshold Increased threshold to 10% of adjusted gross income for a deduction Over age 65 threshold remains at 7.5% through 2016 For alternative minimum tax purposes threshold remains at 10% 18

19 Flexible Spending Accounts Limit $2,500 maximum contribution Reduce Box 1 amount on W-2 Before 2013, unlimited contribution is allowed while employer can impose contribution limit. Results: $13 billion annual tax increase 19

20 Medical Device Tax 2.3% excise tax posed on sale of certain medical devices Manufacturer, producer, or importer of the device is subject to the excise tax when the product is sold. Applies to sales of taxable medical devices after December 31, Impact: costs eventually passed on to consumers Statutory exemptions: eyeglasses, contact lenses, hearing aids and certain other generally purchased devices. 20

21 The American Taxpayer Relief Act of 2012 Extended through 2013: $250,000 of IRC Section 179 expense for leasehold-improvement, restaurant and retail-improvement property. 50% bonus depreciation and 15-year depreciation on qualified real estate. 21

22 Qualified Leasehold Improvement deduction illustration Example: $1,000,000 qualified improvement 2013 Section 179 deduction up to $250,000 (IRC Section 179(f). 50 percent bonus depreciation (Reg. Section 1.168(k)-1(b)(2)(D). 15-year depreciation (IRC Section 168(e)(E)(iv). Deduction: $250,000 Section 179 expense 375,000 bonus depreciation 12,488 first year depreciation Total write off first year: $637, year depreciation Total write-off first year: $24,610 22

23 Qualified Real Estate Qualified leasehold improvement property as defined under IRC Section 168(e)(6) Qualified restaurant property as defined under IRC Section 168 (e) (7) Qualified retail improvement property as defined under IRC Section 168(e)(8) 23

24 What is qualified leasehold improvement? improvement to an interior part of a building that is nonresidential real property. if the improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor, that part of the building is to be occupied exclusively by the lessee (or any sublessee. the improvement is placed in service more than three years after the date the building was first placed in service by any person. 24

25 What doesn t qualify Per IRC Section 168(k)(3)(B), qualified leasehold improvement property does not include any expenditure to enlarge the building, to any elevator or escalator, to any structural component benefiting a common area, or to the internal structural framework of the building. 25

26 Examples of what qualify Utilities Framing Walls Doors Windows Pipe and fittings Plumbing fixtures Fire protection HVAC (heating, ventilation, air conditioning) Permanent interior finishes Permanent floor coverings Millwork and trim 26

27 What is qualified restaurant property? A building or an improvement to a building in which more than 50% of the building s square footage is used in preparation of and for seating for on-premises consumption of prepared meals. 27

28 What is qualified retail improvements? An improvement to an interior portion of a building that is nonresidential real property if that portion of the building is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public. Such improvement is placed in service more than 3 years after the building was first placed in service. 28