Nov 20

Approaching retirement? Review distribution requirements from your retirement plans. Put an estate plan in place if you have not already done so.


In general, distributions from a qualified plan must begin no later than April 1 of the year following the year in which the account owner attains age 70-1/2 or, if later, retires. Distributions are calculated based on the account balance for the year prior to the year in which the distribution is being taken, Mary Kay Foss, CPA, director, Sweeney Kovar, LLP, explained. Another factor used to determine the amount that must be taken as a distribution is the taxpayer’s life expectancy, calculated using the tables in Publication 590.

If the taxpayer is required to take a minimum distribution and fails to do so, a 50-percent penalty will be applied to the amount of the shortfall, Foss explained. She added that the IRS has been known to be generous about waiving these penalties, but they cannot do so until the taxpayer actually withdraws the amount required and explains to the IRS why the distribution was missed.

Foss also discussed the popular exclusion for taxpayers over age 70-1/2 who make charitable contributions from IRA accounts. Taxpayers who made such contributions would meet the RMD requirement for that year and would be able to exclude the distribution from income. The exclusion, unfortunately, expired at the end of 2013, Foss said. However, Congress has been known to retroactively extend the exclusion. Therefore, she advised taxpayers to go ahead and make charitable contributions from their IRAs. Even if the law was not extended, the taxpayer would have made an RMD (albeit a taxable one) and created an itemized deduction for charitable contributions.


In other IRA-related news, Foss laid out the IRS’s revised policy on IRA-to-IRA rollovers following the Tax Court’s ruling A.L. Bobrow, 107 TCM 1110, Dec. 59,823(M), TC Memo. 2014-21. Prior to the Bobrow decision, IRS Publication 590 implied that a taxpayer will multiple IRA accounts could make one IRA-to-IRA rollover per IRA account, per year. However, the IRS has decided to follow the ruling of Bobrow and allow only one rollover per taxpayer, per year. “For 2014, you can still technically do a 60-day rollover per IRA account,” Foss said. She added that the IRS has stated in Announcement 2014-15, I.R.B. 2014-16, 973 (TAXDAY, 2014/03/21, I.2), that it will not apply the Bobrow interpretation of Code Sec. 408(d)(3)(B) to any rollover that involves a distribution occurring before January 1, 2015.

Estate and Gift Tax

The estate tax is imposed on the transfer of the taxable estate of every decedent who is a U.S. citizen or resident, said Kerry R. Hawkins, attorney-advisor for the Chief of Estate and Gift, IRS. For 2014, the estate tax exemption amount is $5,340,000, meaning that a taxpayer who died in 2014 and has a gross estate worth less than $5,340,000, is not subject to the estate tax. For 2015 the exclusion increases to $5,430,000. If a decedent has a gross estate worth more than $5,340,000, then a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is required.

In addition, decedent’s estates are allowed to deduct certain amounts from the gross estate, said Foss. For example, funeral expenses, payments to accountants or attorneys, certain administrative costs and income taxes owed for the tax year may be deducted from the gross estate.

Hawkins explained that the gift tax was unified with the estate tax. “The gift tax is a backstop to the estate tax designed to prevent people from giving away the estate before death,” he said. First, he explained the gift tax annual exclusion. The per-person gift tax annual exclusion is currently $14,000 for both 2014 and 2015. If the gift is less than $14,000, it does not have to be reported to the IRS on Form 709. On the other hand, Hawkins cautioned, if you give someone $14,000 for Christmas, you must go back and calculate value of any other gifts made to that person during the year.

Next, Foss provided an example of how the gift tax related to the estate tax. Speaking to IRS moderator Les Whitmer, she said, “What if I wanted to give you $25,000? If I [am married and] lived in a community property state and gave you $25,000, then that would mean each spouse gave you a gift of $12,500, meaning the gift would not be subject to the gift tax. But if I gave the gift from inherited money from someone else, I would have to sign agreement with my husband to split the gift.” She added, “But what if my husband doesn’t like you and doesn’t agree to split the gift?” She explained that, then, the $14,000 exclusion would be subtracted from the $25,000 gift, leaving $11,000 which must come out of her estate tax exemption going forward. This would leave her with an estate tax exemption of $5,329,000 for 2014.

Foss and Hawkins also warned taxpayers of the generation-skipping transfer (GST) tax, which could have tax consequences for taxpayers who try to give large gifts to people who are much younger than them. “The GST tax is a backstop to estate tax and gift tax,” Hawkins said. Taxpayers formerly found that the easiest way to avoid estate tax was to make transfers to their grandchildren. Congress passed the GST tax to apply to those transfers. “It is paid in addition to any estate or gift tax,” Hawkins said. He added there was an exclusion amount for the GST tax as well.

Foss added that the tax could also apply to a transfer to an unrelated person who is much younger than the transferor. She mentioned that she had a client who gave money to his secretary who was so much younger that the IRS applied the GST tax.

By Jennifer Cordaro, CCH News Staff