Posts by Wendy Shick, CPA, CFP:
Did you miss the deadline to rollover your retirement plan or traditional IRA funds due to circumstances beyond your control? In the past, such an issue would have resulted in issues on your tax return and/or an expensive private letter ruling request, culminating in a full-fledged assault on your retirement nest egg. Fortunately, the IRS released new guidance that may eliminate this costly headache by simplifying the way retirement rollovers are managed when they are made outside of the 60-day rollover deadline.
Effective Aug. 24, 2016, according to the IRS, taxpayers who miss the 60-day deadline for at least one of the 11 specific reasons outlined in Rev. Proc. 2016-47, may avoid immediate taxation if a self-certification letter is submitted to the IRA trustee or plan administrator. Under the new rule, as long as the reason for their tardiness meets one or more of the 11 conditions outlined in the provision and the late rollover contribution is completed “as soon as practicable after the applicable reason (s) no longer prevents the taxpayer from making the contribution. The practicable timeframe is noted as 30 days in the guidance.
Read Also: Brush Up On These New Tax Form Due Dates
With regard to the validity of the taxpayer’s claim, the revenue procedure indicates that self-certification is all that’s required to be completed and submitted to the trustee or plan administrator. Please note, however, that the self-certification is not to be considered a waiver of the 60-day requirement as the IRS reserves the right to deny the request if an audit finds that the taxpayer failed to meet the requirements of Rev. Proc. 2016-47.
11 Reasons To File Your Late Rollover Contribution Self-Certification Letter
As long as the IRS has not previously denied the taxpayer’s waiver request made with respect to a rollover contribution of all or part of a related distribution, the 11 conditions considered to be acceptable for missing the 60-day deadline are:
- An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
- The distribution having been made in the form of a check, was misplaced and never cashed;
- The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
- The taxpayer’s principal residence was severely damaged;
- A member of the taxpayer’s family died;
- The taxpayer or a member of the taxpayer’s family was seriously ill;
- The taxpayer was incarcerated;
- Restrictions were imposed by a foreign country;
- A postal error occurred;
- The distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
- The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.
This is a big win for the American taxpayer, as it effectively lifts a range of restrictions known to hinder taxpayers’ efforts to save for their golden years due to circumstances beyond their control – saving “thousands of IRAs from the harsh bite of needless and accelerated taxation.” To make a certified late rollover contribution, your letter must also adhere to certain specifications. I recommend customizing the letter provided by the IRS in Rev. Proc. 2016-47. It can be accessed here. Once you have completed the letter, remember to retain a copy of it in your files to ensure it is available if the IRS requests this information during an audit.
Email Rea & Associates to learn more about how this new provision will be beneficial to you.
By Wendy Shick, CPA, CFP (Mentor office)
Check out these articles for more great helpful information to review as you prepare to file your taxes:
What to know when reporting your fantasy football winnings – or losses
When you sit down with your CPA to go over last year’s taxable income and they ask you how your fantasy football team did this year, they aren’t just looking to engage you in casual conversation. In fact, how well (or how poorly) you did over the last year might make a difference in the size of your tax bill.
According to the Fantasy Sports Trade Association (FSTA), about 56.8 million people spent their time and money on fantasy sports in 2015 – 73 percent of them were fantasy football players. And, on average, over a 12-month period, players spent about $465 on league-related costs, single-player challenge games and league-related material. In short – fantasy sports has become a serious business and, as with most business matters, you should be prepared to report your fantasy sports winnings (or losses) to the IRS on Form 1040.
Read Also: Are You Missing Out On Tax Incentives?
Fantasy Money Spends The Same As Real Money
Just because your football team is fantasy doesn’t mean your money is, and when real money is being exchanged, you have an obligation to report it on your tax forms. However, because the IRS has yet to identify proper treatment of fantasy sport income and losses, the jury is still out on the “proper” way to report these fantasy winnings/losses on tax returns. And, from a state perspective, while most departments of taxation are struggling to identify the proper treatment of these funds, a few have issued guidance focused on fantasy sports operators.
Not Just A Hobby?
How your fantasy sports activity is classified will affect how your income – or lack thereof – is reported. Specifically, taxpayers need to know whether or not the IRS considers their fantasy football activity to be gambling and whether “the activity is not engaged in for profit (i.e., a hobby activity, if it is not gambling, or casual gambling, if it is gambling) or if the activity rises to the level of being a trade or business.”
In the article, “How to report clients’ fantasy football winnings,” that appeared in the February edition of the Journal of Accountancy, David Baldwin, CPA/PFS and Donald J. Zidik, CPA, provided some excellent insight into the 4 primary types of activity your fantasy football pastime could be classified as. Below is a brief synopsis.
Ultimately, at this time, how your CPA will classify your fantasy football activity depends on your own facts and circumstances. While you may consider fantasy football to be a hobby, someone else may be using it has a significant source of income.
A hobby activity
For most people, fantasy football would be classified as a hobby – meaning that it does not receive the level of activity required to qualify as a trade or business. In this case, your reporting would be guided by hobby loss rules and reported on line 21 of your IRS Form 1040. Deductions are generally allowed only up to the amount of income you secured as a result of the activity and only if you itemize your deductions. Your expenses, which are reported as miscellaneous itemized deductions, are subject to the 2 percent-of-adjusted-gross-income (AGI) floor and disallowed for alternative minimum tax (AMT) purposes. Your expenses would include your entrance fees for losing contests and other expenses you incurred as a result of the activity.
A nongambling activity – trade or business
Do you keep accurate books and records and conduct your fantasy football activity in a businesslike manner? Then it may qualify as a trade or business. Final judgment, however, is left to the IRS, which will determine if the activity contains elements of personal pleasure or recreation. If you do qualify for this classification though, your ordinary and necessary expenses could be deductible and your net income would be subject to self-employment tax. Your activity will be reported to the IRS on Schedule C.
Casual gambling activity
Would you consider your fantasy football gambling? If so, then you will need to refer to the usual rules governing gambling activities, which means that your entrance fees for losing contests should be reported as gambling losses and allowable only if you itemize your deductions. Different from hobby activity, your losses (to the extent of your winnings) are considered miscellaneous itemized deductions and are not subject to the 2 percent-of-AGI floor and, therefore, are not disallowed for AMT purposes and excess losses cannot be carried over to another year. Your winnings, on the other hand, will need to be reported as income – even if your losses exceed your winnings.
Professional gambling activity – trade or business
If you consider your fantasy football activity to be gambling, and you consider you level of involvement to be “full-time,” and as a means for producing income to sustain a livelihood, you could be considered a professional gambler in the grade or business of gambling. This means that your gambling losses can only be deducted to the extent of your gains and your losses in excess of your gains cannot be carried over to another year. That being said, ordinary and necessary business expenses you incur to engage in the gambling activity are deductible. You will need to report your winnings and losses on Form Schedule C.
For more tax tips, listen to episode 9: taxes are like fishing, of unsuitable on Rea Radio to learn more about strategic tax preparation.
By Wendy Shick, CPA, CFP (Mentor office)
Are you looking for more helpful articles to help you with your tax preparation? These should help:
By now, you probably have a good idea whether you have an outstanding tax bill from the government, but did you know you can settle your balance online? Since May 2014, Direct Pay, a free and secure payment option, has provided millions of taxpayers with the option of making payments to the Internal Revenue Service at a time, and in a place that is convenient for them.
Late last year, employers learned that they were expected to file their taxes and make payments exclusively online. Click here to read more.
According to the IRS, four months after the initial launch of the payment program, more than a million payments, totaling more than $1.7 billion, were successfully processed. The web site currently accepts payments for current year tax returns, estimated tax payments, extension payments and prior year balances.
Available 24 hours a day, seven days a week, Direct Pay has proven to be a popular choice among Americans who are looking for a quick and easy option for settling their tax balances. Those who make payments receive an instant confirmation message that their payment has been submitted. Or, if you need a little more time, you can schedule your payment up to 30 days in advance as well as choose if you would like your payment to be withdrawn directly from a checking or savings account. Making a payment is as easy as following six simple steps.
How To Make An Online Tax Payment
- Visit the government website at www.irs.gov/payments
- Click on the blue box labeled: “IRS Direct Pay”
- Choose the reason for making your payment. Your choices are that you are making an installment agreement payment, a tax return payment, an estimated tax payment, an amended return payment or “other” type of payment. Be sure to choose the applicable year.
- Next, verify your identity by confirming your filing status, social security number, address and date of birth. ID verification is required for each payment requested.
- Then, you must enter the amount you plan to pay and your bank information. (The IRS does not retain any routing or account numbers.
- Finally, you will be directed to a “final authorization” page, which will provide you with an online confirmation.
Once your payment has been submitted using Direct Pay, allow two business days for processing. Note: Payments submitted after 8 p.m. EST will be processed on the next business day. And if you need to make a change to your scheduled payment, you can edit or cancel the payment up to 11:59 p.m. EST two business days before the payment is scheduled payment date.
Ohio Online Tax Payments
If you owe taxes to the State of Ohio, you can make your payments online as well by visiting www.tax.ohio.gov. The state’s online payment system also allows for advance payments and does not require registration.
Online payment options are another way government entities are making an effort to provide more user friendly services. By using Direct Pay, or the state’s web-based payment option, you can avoid a trip to the post office and, better yet, have more control over when your payment is made and received. Your tax preparer can help you determine if online payments make sense for you and can answer any questions you may have. Email Rea & Associates to learn more.
By Wendy Shick, CPA (Mentor office)
Last month, the U.S. Supreme Court unanimously ruled that inherited individual retirement accounts (IRA) are subject to creditor claims in bankruptcy. In layman’s terms … if you pass away and have an IRA and your IRA beneficiary has to declare bankruptcy, your IRA money could wind up in the hands of the creditors your beneficiary owes money to.
Because of this court ruling, if you have an IRA, you should consult with your advisors (attorney and financial advisor) who are experienced in asset protection, estate planning and income tax considerations for IRAs. This is especially important if you have a material balance in an IRA and an intended beneficiary has known or potential creditor issues.
Digging Into The Details
An inherited IRA is where an individual is named as a beneficiary on an IRA application document and the individual becomes the holder of an account after the original owner of the account passes away.
In Clark v. Rameker, the Supreme Court reviewed three important distinctions between an inherited IRA when compared to other traditional retirement assets. For an inherited IRA, the holders are:
- Not allowed to make additional contributions to the account
- Required to withdraw funds regardless of whether they have reached retirement age
- May withdraw assets at any time without an income tax penalty
Given these distinctions, the Supreme Court ruled that “funds held in such account are not objectively set aside for the purpose of retirement.” Experts on the subject have concerns about whether spousal rollovers continue to be exempt from creditors as well.
Some Planning Opportunities Remain
Going forward, inherited IRAs have fewer creditor protection characteristics. However, there are still planning opportunities available under some state creditor exemptions or by naming a qualified trust as the beneficiary.
If a trust is used as a beneficiary of an IRA, the trust must be drafted properly. The trust can help shield trust assets from creditors. Adding a trust as the beneficiary can make the process more complex and add additional costs to create and administer the trust. Also additional income tax burdens may exist, depending on the trust’s terms.
Overall, this ruling is particularly important if you own a significant IRA account or if you inherit an IRA. Have a conversation with your advisors to review all the rules before making beneficiary designations or transferring balances after someone’s death.
Ohio Tax Assistance
If you have questions and/or concerns about your retirement options, contact Rea & Associates. Our team of Ohio tax professionals can help you determine if the inquiry is legitimate, and assist you with responding.
Author: Wendy Shick, CPA, CFP (Mentor office)
Looking for other articles about inheritance options? Check out these articles:
We’re three months into 2014, and you may be thinking about what charitable donations you’d like to make this year. If you’re planning to make a donation to a qualified 501(c)(3) non-profit organization, make sure to look at your investment portfolio before you write a check. Read the rest of this entry “
Are you in the market for a new home? Or maybe you’re looking to purchase a new car for your daughter or son? Don’t have enough cash for a down payment? No problem. There’s a nice workaround that can provide short-term relief for your immediate need. Read the rest of this entry “
Tax deductions aren’t the only reason that you make charitable contributions – but they’re a nice perk! Unfortunately, the IRS has been cracking down on the documentation required for charitable contribution deductions. Here’s what you need to know to make sure that your charitable contributions get you the deductions that you deserve. Read the rest of this entry “
With our government requiring more cash each year, there is growing sentiment is the financial community that the IRS is becoming more vigilant in obtaining all revenue available related to Individual Retirement Accounts (IRAs). According to a recent article, the Treasury Inspector General for Tax Administration estimates that the IRS failed to collect as much as $286 million of revenue in 2006 and 2007 alone. From a political aspect, it is easier to raise revenue by simply enforcing the existing rules, than it is to cut spending or pass a new tax increase. Read the rest of this entry “
If you’re not yet nearing retirement age, Social Security probably means two things to you: the amount of money that disappears from your pay checks and the annual statements that you get in the mail. If you’ve ever taken the time to read these statements, you’ve probably learned some neat things about your finances – like your lifelong earning history and the amount of Social Security benefits that you’d receive if you were to need them right now. Read the rest of this entry “
Tax identity theft is an increasingly enormous problem. The IRS has been bombarding us with warnings of identity theft and scams this tax season.
Here’s a summary of some of the latest information you should know. Read the rest of this entry “
A question we hear quite often during tax season relates to when it is necessary to file a tax return for a dependent child. Some people think that money held in an account intended for college education is exempt from taxation. That is not the case, unless the account is an Education IRA or Section 529 plan. If the investments are held in a custodial account or held in the child’s individual name, the child is deemed the owner and the income is attributable to him/her. Read the rest of this entry “
If you took advantage of last year’s law change allowing you to convert your IRA to a Roth IRA, you face a big all-or-nothing tax payment decision on April 18: pay the taxes on your pretax contributions and gains in 2010, or split the tax bill between 2011 and 2012. Read the rest of this entry “
The IRS will not accept federal returns from taxpayers who claim itemized deductions until February 14. The delay is necessary for the IRS to program its systems to accommodate tax breaks included in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Read the rest of this entry “
When Congress passed the Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 during the lame duck session late last year, one element of the bill puts more money in the pockets of employees through a one-year cut in Social Security taxes. Read the rest of this entry “
It’s hard to believe, but 2010 is already half-way over. How are you doing at hitting your financial goals for the year, and are you taking advantage of the tax benefits this year is bringing? It’s time to consider a six-month financial check-up. Here are some items to consider for the remainder of the year. Read the rest of this entry “
We’ve heard a lot about the benefits of converting your traditional IRA to a Roth IRA over the past several months, and you probably already know the decision has many considerations. Here are three more to consider: Read the rest of this entry “