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IRS Related Topics July 9, 2014 Asian Indian Americans of Central Pennsylvania (AIACPA)

IRS Related Topics July 9, 2014 Asian Indian Americans of Central Pennsylvania (AIACPA). 1. The material contained in this presentation has been prepared for information purpose only and does not constitute legal, tax or investment advice.

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IRS Related Topics July 9, 2014 Asian Indian Americans of Central Pennsylvania (AIACPA)

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  1. IRS Related Topics July 9, 2014 Asian Indian Americans of Central Pennsylvania (AIACPA) 1

  2. The material contained in this presentation has been prepared for information purpose only and does not constitute legal, tax or investment advice. • Every individual should consult his/her own legal, tax or investment advisor before making any legal, tax or investment decision. 2

  3. IRS RELATED TOPICS • Taxpayer Bill of Rights • TAP/TAS/VITA/TCE • PUB. 17 • PUB. 590.. IRA contribution, rollover & distributions… RMDs • Reporting foreign accounts, gifts & properties • IRS related frauds • Bitcoin

  4. Taxpayer Bill of Rights • The Right to Be Informed • The Right to Quality Service • The Right to Pay No More than the Correct Amount of Tax • The Right to Challenge the IRS’s Position and Be Heard • The Right to Appeal an IRS Decision in an Independent Forum • The Right to Finality • The Right to Privacy • The Right to Confidentiality • The Right to Retain Representation • The Right to a Fair and Just Tax System

  5. What is TAP? TAP (Taxpayer Advocacy Panel) is an independent advisory committee under the Federal Advisory Committee Act of 1972

  6. National Taxpayer Advocate Organization

  7. TAP Organization Joint Committee (Governing Body) Sub-committees: • Notice & Correspondence • Forms & Publications • Taxpayer Communications • Toll-Free Phone Line • Taxpayer Assistance Center Improvement

  8. What TAP Can Do? 1. Identify grassroots issues for the TAP 2. Work on issues raised by taxpayers e.g. Reinstitute AMT guide in 1040 Instr. Book 3. Work on IRS projects and initiatives e.g. Re-write Pub 590 4. Outreach to let the public know about the TAP 8

  9. What TAP Cannot Do? 1. Handle individual tax issues 2. Legislative issues 3. Lobby for change in tax code

  10. How can you submit your suggestions or comments to TAP? 1. Complete the Speak-Up brochure and mail it in. 2. Call 1-888-912-1227 3. Place your suggestions/comments using www.improveirs.org 4. Contact your local TAP member • mgpbmp@yahoo.com 10

  11. TAXPAYER ADVOCATE SERVICE (TAS) • Created by Congress to be an independent entity within the IRS to assist customers who are experiencing federal tax problems • Case and Systemic Advocacy • Administrates Low Income Taxpayer Clinic Program like VITA (Volunteer Income Tax Assistance) • Supports Taxpayer Advocacy Panel (TAP) • Your voice at IRS. Call 877-777-4778

  12. TAXPAYER ADVOCATE SERVICE (TAS) • Assists Taxpayers with particular account-related federal tax problems that are creating a hardship for the taxpayer or have not been resolvable through the normal system • LTAs are Subject Matter Experts assigned portfolio topic • At least one office in every state • PA has 2 offices: Philadelphia & Pittsburgh

  13. TAXPAYER ADVOCATE SERVICE CRITERIA Taxpayers facing an economic burden: 1) Taxpayers suffering economic harm 2) Taxpayers with an immediate threat of adverse action 3) Taxpayers who will incur significant costs 4) Taxpayers who will suffer irreparable injury or harm

  14. TAXPAYER ADVOCATE SERVICE CRITERIA (Cont.) Taxpayers are facing a Systemic burden: 1) A delay of more than 30 days beyond normal processing times 2) No IRS response by the date promised 3) A system or procedure failed to operate as intended or failed to resolve the taxpayer’s problem or dispute with the IRS Phone # for Philly office: 215-861-1290

  15. Volunteer Income Tax Assistance (VITA) & Tax Counseling for Elderly (TCE) Program • VITA for Low Income taxpayers • TCE for 60 years & older taxpayers • Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own re-turn with help from an IRS-certified volunteer. • To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS.gov, download the IRS2Go app, or call 1-800-906-9887.

  16. VITA & TCE PROGRAMS (cont.) • As part of the TCE program, AARP offers the Tax-Aide counseling program. To find the nearest AARP Tax-Aide site, visit AARP's website at www.aarp.org/money/taxaide or call 1-888-227-7669. • For more information on these programs, go to IRS.gov and enter “VITA” in the search box.

  17. PUBLICATION 17 • It is detailed guide for tax return preparation like a ROAD MAP • Covers: • Filing information, exemptions, tax withholding & estimated tax (pub 505) • Explains all kinds of incomes, capital or business gains & losses, adjustments to income, standard & itemized deductions • Explains how to compute income tax & credits • Includes all tax tables, tax computation worksheet & tax rate schedules

  18. PUBLICATION 590Individual Retirement Arrangements(IRAs) Covers all Qualified Employer Plans, such as: • Qualified pension, profit sharing, or stock bonus (Section 401(a) plan) • 401(k) & Roth 401(k) • Qualified Employee Annuity Plan (Section 403(a) plan) • Tax-sheltered Annuity Plan (Section 403(b) plan) (Pub. 571) • Deferred Comp Plan (Section 457 plan)… for government agencies • Defined Benefit (KEOG or HR10) Plan • FOR SIMPLIFIED EMPLOYEE PENSION IRA (SEP IRA) refer to Pub 560 • Traditional & Roth IRAs (Pub. 590)

  19. Pub 590(cont.)Kinds of Traditional IRAs • Individual Retirement Account (IRA) • Individual Retirement Annuity (Fixed period; Fixed rate; Variable rate; Single life; Joint & Survivor; etc. Annuities) • Individual Retirement Bonds • Simplified Employee Pension (SEP IRA) • Employer and Employee Association Trust Account

  20. Pub 590 (cont.) Covers: • Setting up an IRA 2. Contributing to an IRA 3. Transferring money or property to and from an IRA 4. Handling an inherited IRA 5. Receiving distributions (making withdrawals) from an IRA, and 6. Taking a credit for contribution to an IRA

  21. 2A. Contributing to Traditional IRA • Must have taxable compensation & less than 70.5 years of age at the end of the year • Both spouses can contribute even if only one has income & filing joint tax return • Income limits for deductible contribution (if you are covered by employer retirement plan): • Single-AGI: $60K & phased out at $70K • Married filing jointly & both have employer retirement plan-AGI: $96K-$116K • Married w/ one spouse has a retirement plan & filing jointly- AGI: $181K-191K • Can’t contribute more than taxable compensation

  22. 2A. Contributing to Traditional IRA (cont.) • Income limits for deductible contribution (if you are NOTcovered by employer retirement plan): • Single, or married & filing jointly: NO income limit • FULL DEDUCTION OF CONTRIBUTION • For 2014 deductible contribution limit: $5,500 or $6,500 if you are 50 years of age or more ****************************************************** • NO INCOME LIMIT for contribution but watch for deductible & non-deductible contribution income limits • Must file Form 8606if you make non-deductible contribution

  23. 2A. Contributing to Traditional IRA (cont.) • Contribution must be in form of MONEY & NOT Property • Note: Rollover or transfer from Traditional IRA can be MONEY or PROPERTY

  24. Should one contribute to Traditional IRA? • Do not contribute to traditional IRA if: • You are young and anticipate higher income in later years including retirement age. Instead contribute in ROTH IRA • You are thinking of traditional IRA for survivors’ benefit; instead buy whole life or similar life insurance • Contribute to Traditional IRA if: • You anticipate lower tax bracket when you retire. • You cannot contribute to ROTH IRA directly and you intend to rollover to ROTH IRA from Traditional IRA.

  25. 2B. Contribution to ROTH IRA • Contribution is NOT deductible • Can contribute at any age • Withdrawals are tax free • Contribution limitations: Lesser of: - $5,500 ($6,500 for 50 years age or older) - taxable compensation • Must have Modified AGI(2014) less than: * $191K for couple filing jointly or qualified widow(er) * $129K for single

  26. 2B. DesignatedRoth Accounts thru employers • Designated Roth 401(K)- Tax-sheltered employer managed retirement plan • Designated Roth 403(b)- Tax-sheltered Annuity Plan • Designated Roth 457(b)- Tax-sheltered Deferred Compensation Plan *********************************** • Contribution to such plans are NOT ROTH IRA. • Can contribute in ROTH IRA and Roth 401(K), Roth 403(B) or Roth 457(b) • Watch for Income limit for Roth IRA contribution

  27. 2B. Contribution to Traditional & Roth IRAs • The combined contribution cannot be more than limit applicable • Employer contributions under a SEP or SIMPLE IRA do not affect IRA/Roth IRA contribution limits.

  28. 3. Transferring money or property to and from an IRA • Kinds of transfers: A. Trustee-to-Trustee Transfer: Transfer from one trustee to another (bank to bank, trustee to trustee, broker to broker, etc.) B. Rollovers C. Transfer incident to a divorce By: - Changing the name on IRA - Making a direct transfer of IRA assets D. Converting Traditional IRA to Roth IRA

  29. 3.A: Trustee-to-Trustee Transfer • It is not a Rollover • It is tax free transfer • Not affected by the 1-year waiting period between rollovers

  30. 3B. Rollovers • Cannot Deduct a rollover as a new contribution • Must report on your tax return rollover distribution from IRAs in 1040 or 1040A • Refer to Rollover Table 1-4 (p.23 of Pub 590… see next slide)

  31. 3B. Rollovers (Cont.) • Must be done within 60 days of receiving distribution (i.e. from one plan to another due to job change) • Waiting period between rollovers of distributionfrom same IRA: 1 year • Exceptions: - Financial institution failure - Other Institution failure - Eligible rollover distributions from an employer plan • The same propertymust be rolled over

  32. 3B. Rollovers (Cont.) • Can’t rollover RMD- (Required Minimum Distribution) • Partial rollovers of a distribution is ok but need to pay tax on the property not rolled over • Rollover by non-spouse beneficiary: Rollover by a direct trustee to trustee transfer into an INHERITED IRA • Withholdings: Depends on direct rollover vs. payment to you (see Table: 1-5)… next slide

  33. Comparison of Payment to You Versus Direct Rollover

  34. 3.D Converting Traditional IRA to Roth IRA • Can convert any or all assets • 10% tax penalty for early withdrawal if neither same asset nor within 60 days of withdrawal conversion is made • Cannot convert RMD to Roth • Conversion is taxable except for the basis of post-tax contributions to traditional IRA • Must complete Form 8606

  35. 3.D Converting Traditional IRA to Roth IRA (Cont.) • Recharacterizations: • Include net income (loss) in the transfer • Report in tax return using Form 8606 • The original contribution date is maintained • Recharacterization is not a rollover • Deadline for recharacterization: • October 15th of the following year • Minimum waiting period for reconversion: • 30 days after the recharacterization or • The year following the year of the rollover or conversion

  36. 4. Handling Inherited IRA A. INHERITED FROM SPOUSE • Treat as your own IRA by designating yourself as the account owner • Treat as your own by rolling into your own IRA, or to the extent it is taxable, into a: • Qualified Employer Plan • Qualified Employee Annuity Plan (403(a) plan) • Tax-sheltered Annuity Plan (403(b) plan) • Deferred Comp Plan of a state or local gov’t (457 Plan) • Treat yourself as the beneficiary rather than owner

  37. 4. Handling Inherited IRA (cont.) B. Inherited from non-spousalIRA - Trusty to trustee (NO Checks) transferin the name of the deceased IRA owner for the benefit of you as beneficiary (if not done as such pay tax on full withdrawal + 6% interest penalty for excess contribution) - Owe taxes only upon your withdrawals - RMD at beneficiary’s age i.e. single life.. (Use Table 1 in Appendix C) - IRA with basis: basis are carried with the account & cannot be combined with your own IRA basis

  38. 5. Receiving Distribution from IRAs • RMD at 70-1/2 age • Can take first RMD by April 1stof the year following the year in which you are 70-1/2 • If no or less than required min. RMD is taken pay 50% excise tax on the amount not distributed • No credit for more than RMD withdrawal, for next year • If owner dies after reaching 70-1/2, but before April 1st of the next year NO RMD needed

  39. 5. Receiving Distribution from IRAs (cont.) • Distribution from Individual IRAs: - Uniform Lifetime (no spouse or spouse is not more than 10 years younger; or spouse is not the sole beneficiary of IRAs): Use Table III in Appendix C to determine distribution period - Joint Life & Last Survivor Expectancy (spouse more than 10 years younger & the sole beneficiary of IRAs): Use Table II. - Single Life Expectancy (for beneficiaries): Use Table I • Distr. =Balance as of Dec. 31 of previous year divided by distribution Period

  40. 5. Receiving Distribution from IRAs (cont.) • Effects of death of owner before OR after Required Distribution Date: • For different scenarios: refer to P. 36 – 40 of Pub. 590 • RMD for more than one IRA accounts: a. For the owner: RMD could be separate or combined depending upon basis b. Multiple individual beneficiaries: If as of September 30 of the year following the year in which owner dies, the beneficiary with shortest life expectancy will be used in determining RMD. If a trust is one of the beneficiaries 5 distribution rule applies to all.

  41. 5. Receiving Distribution from IRAs (cont.) • RMD for more than one IRA accounts (cont.): c. Separate Account for each beneficiary: If IRA is split per will or trust before 9/30 date of year after the death of the owner, use age of individual for his/her RMD determination d. Trust as beneficiary (look-thru Trust): A trust itself can’t be beneficiary. The beneficiary of trust must use the above rules. - NOTE: Trustee must provide beneficiary documents to the IRA custodian by Oct. 31st of the year following owner’s death.

  42. 5. Receiving Distribution from IRAs (cont.) • RMD for more than one IRA accounts (conti.): e. Trust beneficiary is another trust: - Both trusts must meet aforementioned requirements. - The beneficiary of the other trust will be treated as designated beneficiaries for determining distribution period • IRA Annuity Distributions: Follow Treasury Reg. 1.401(a)(9)-6 and 54.4974-2

  43. Taxability of Distributions • From Failed Financial Institution: Unless the distribution is rolled over, the distr. is taxable • Qualified Charitable distributions: Non-taxable if made directly thru trustee • Nondeductible Contributions: Use Form 8606 to determine taxable and non-taxable distributions • Recognizing Losses on Traditional IRA investments: Only after all amount is withdrawn & subject to 2% of AGI income limit in misc. itemized deductions

  44. Taxability of Distributions (cont.) • Penalties or Additional Taxes: • Investment in collectibles (treated as distribution in the year it is purchased & taxed accordingly) • Making excess contributions (6% if not withdrawn in the year contributed and thereafter if not withdrawn) • Taking early distributions (10% if withdrawn at age earlier than 59-1/2 with numerous exceptions such as for disabled, widow, high medical insurance costs, to cover higher education expenses, distribution from annuity, first home purchase, IRS levy on qualified plan, and for a qualified reservist)

  45. Taxability of Distributions (cont.) • Penalties or Additional Taxes (cont.): • Failing to take RMD (50% excise tax on the amount not withdrawn) • Prohibited transactions (10% - 15% additional tax and 100% additional tax if it is not corrected): e.g. borrowing money from IRA, selling property to it, using as security for a loan, buying property for personal use, etc. • USE FORM 5329 TO DETERMINE ADDITIONAL TAXES ON QUALIFIED PLANS. Seek Professional help as these taxes could be significant.

  46. Distribution from Roth IRAs • Distribution is tax free beyond 5 years holding period after contribution • Owner may or may not take distribution • Beneficiaries: Distribution rules are same as for Individual IRA (Slides # 36 & 37)

  47. Foreign Accounts, Gifts & Property Reporting • Foreign Financial Assets (FATCA) • Form 8938 • Foreign Bank & financial Accounts Reporting (FBAR) • FinCEN Form 114 • Foreign Gifts OR Bequests (inheritance thru WILL or Trust) • Form 3520

  48. Foreign Financial Assets (a part of Foreign Account tax Compliance Act (FATCA)) • What counts as a foreign asset? - Financial accounts at financial institution located outside of USA • Stocks, bonds or other securities issued by a non-US person and not held thru an investment account • Any interest in foreign entity, such as foreign corporation, partnership or trust • Any financial instrument or contract that has an issuer or counterparty that is not a US citizen • When to file Form 8938?: File with Tax return

  49. Foreign Financial Assets (a part of ForeignAccount Tax Compliance Act (FATCA)) (cont.) • Who is required to file Form 8938? • US citizens, resident aliens, non-resident aliens who elected to be treated as resident aliens and non-resident aliens in Samoa & Puerto Rico • Reporting Thresholds for Form 8938: • Depends on foreign income & filing status (individual or jointly), and whether live in USA or outside of USA NOTE: FOREIGN INVESTMENT HELD THRU USA BASED INVESTMENT ACCOUNT ARE NOT REPORTED On FORM 8938

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