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Fundamentals of Retirement Tax Planning

April 18, 2013 By

Most taxpayers facing financial hardship might be forced to turn to their retirement savings as a last resort to either partially or fully supplement their living expenses. However, this is normally a hard decision to make, due to the high early withdrawal IRS taxes and penalties. It is very likely that any withdrawal made from IRAs, 401Ks, and other qualified pension & retirement plans will attract a federal tax.

If you had a pension plan with a previous employer, you are possibly wondering if you should just roll it over into a traditional IRA or new plan. Most retirement plans are designed to rollover from one trustee to another. In such cases, the taxpayer receives a 1099R indicating the rollover but with nil taxable amount. As much as this might appear to be an ideal way to dodge paying taxes on your retirement savings, it may on the other hand, not appeal to some taxpayers who need their money immediately.

In case of urgent financial need, the pension plan will generally hold back 20% Federal withholding and a set percentage for the state. It is a huge blunder to generally assume that distributions attract all federal taxes. In real sense, only about 10% of the 20% federal withholding goes to taxes, while the other 10% might be an early withdrawal penalty. The definite tax amount can be established based on their marginal tax rate. Example: If you are in the 15% tax bracket, you will possibly pay a 15% tax on distribution. The withholding doesn’t cover all early withdrawal penalties and resultant taxes, it is therefore, important to contact your tax pro with all necessary income details to calculate the most accurate tax estimate.

Modes of withdrawals vary from one plan to another. Most of them however allow taxpayers to withdraw a lump sum distribution, or stretch them over a specific duration, or both. With such a distribution, all taxable income from the withdrawals is squeezed into a single year. It is very unlikely that you will be subjected to any withdrawal penalties, but you may have to pay normal taxes. However, you might be baffled if a lump sum withdrawal pushes you to a higher income tax bracket, digging further into your finances. Other than the lump sum, there are other factors that may affect your taxes like:

·         Wages before retirement

·         Retirement payouts

·         Severance payouts

·         Monthly pension payments

·         Social Security benefits

All these factors must also be looked into before making a withdrawal. You can evade some of the taxes by taking the retirement savings as annuity, but this will also depend on how well you plan your income.

It is very important to plan and weigh all available options and consequences of each action before taking funds out of a retirement savings account. Talk to a tax pro who will help you understand the fundamental taxes on withdrawals, review your income, offer help on your W-4, tax estimation, and even clarify on various rollover options.

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Boost your Refund with these Four Tax Credits

July 20, 2012 By

Many taxpayers glance at the amount they pay in taxes and frown, cursing Uncle Sam for being insensitive. However, aggressive complaints can never help, as the government cannot operate without your taxes. To help you pay your taxes without feeling the “pinch,” the IRS has an array of tax relief options that taxpayers can turn to, one of which being tax credits.

A tax credit is simply a dollar-for-dollar lessening of the actual amount of taxes you owe the IRS. The IRS has made some of the tax credits refundable where eligible taxpayers who claim one of the credits can get the rest as a tax refund regardless of the status of the liability, even if it has been grounded to zero.

You can increase your refund by taking advantage of the following tax credits;

1. The Earned Income Tax Credit: If your earnings from wages, farming or self-employment are less than $49,078, then this is the tax credit for you. If you have been earning more than this amount in the past, but you saw your income come down last year, you might qualify for the very first time. The amount of credit is set based on your age, the number of eligible kids and income, with the maximum set at $5,751. If you don’t have kids, you might still qualify; see the IRS Publication 596-Earned Income Credit.

2. The Child and Dependent Care Credit: Taxpayers who work or search for work but have kids aged below 13, have a disabled spouse or dependent can benefit from this credit. Review Publication 503-Child and Dependent Care Expenses for more information.

3. The Child Tax Credit: This credit has a maximum of $1,000 for every eligible child and can be claimed on top of the Child and Dependent Care Credit. Read IRS Publication 972, Child Tax Credit.

4. The Retirement Savings Contribution Credit: Also known as the Saver’s Credit, it seeks to enable low-to-moderate income earners put away some funds for their retirement. To qualify, your income has to be below a specific limit and you making contributions to an IRA or a workplace retirement plan like a 401 (k). You can get this credit on top of other applicable tax savings. See the IRS Publication 590-Individual Retirement Arrangements (IRAs) for more information.

Depending on your personal circumstances and facts, there is an array of other tax credits that might be applicable to you. Read carefully the instructions contained on tax forms to see if you are eligible. Check out the IRS website for any other additional information on these tax credits. You can also get phone support on 800-TAX-FORM (800-829-3676).

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6 Facts about the Retirement Savings Contribution Credits

June 28, 2012 By

Do you contribute to an individual retirement plan or one sponsored by the employer? If you do, then you might qualify for a tax credit which is given according to a person’s age or income levels. Explained below are six tips you should know about the savers credit.

1. Income Limits: Initially referred to as the Retirement Savings Contributions Credit, savers credit was introduced and applied to taxpayers who had filing statuses and a 2011 income of; $28,250 for the qualified widow(er)s, single taxpayers, or married ones but who file separately. Married filers who file joint returns with an up to $56,500 income and household heads with an over $42,375 income are also eligible.

2. Eligibility Criterion: Only those who are 18 years or older, not full-students in the calendar year, and aren’t claimed as dependents on another’s returns qualify for the credit.

3. Credit Value: One can take home to a maximum of $1,000 or ($2,000 for joint filers) if they make legitimate IRA, 401 (k) contributions, as well as other specific retirement plans. This credit is a fraction of the eligible amount you contribute towards these plans with taxpayers with the least income getting the highest rate.

4. Subtraction of Distribution: While determining this credit, you have to deduct any allocation you receive from the retirement plans you contributed to. This rule is however, applicable to received distributions within the 2 years; the year when you claim the credit, the year when the credit claim is paid and duration before the due date, plus extensions for filing any tax returns, and after the credit year has ended.

5. Other Benefits: The Retirement Savings Contributions Credits only add to other tax receivable benefits for contributions made towards retirement. Many employees in the set income brackets may decide to subtract if not all, part of their conventional IRA contributions. Any contributions made to the normal 401 (k) plan are not taxable until their withdrawal from the plan.

6. Forms to Use to Apply: The main form used to claim this credit is the Form 8880 called the Credit for Qualified Retirement Savings Contributions.

Tax credits are introduced by the IRS to help relieve deserving and struggling taxpayers their tax burden. Therefore, qualified individuals must be fast in claiming them appropriately.

For additional and more detailed information about this credit, read the IRS Publication 4703- Retirement Savings Contributions Credit, Publication 590-Individual Retirement Arrangements (IRAs), and Form 8880. All the relevant forms and publications are downloadable from the IRS website. They can also be ordered via phone by calling 800-TAX-FORM (800-829-3676).

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Holiday Tax Strategies that will Pay off in April

November 15, 2011 By


Christmas is almost here. Thanksgiving is a just a few days away. With all the holidays, most of us want to relax and the last thing you want to share a piece of your ready-to-relax mind is taxes. Yes, we dread not only paying them, but even the idea of filing returns in April makes some of us…crankier than Scrooge! You may grunt all you can but there are a few steps , which can be taken between now and December 31, 2011, to make your future tax burdens less of an “inconvenience.” You may even look forward to your next encounter with the taxman, the IRS, come spring next year.

1. Give Your Money Away

Sometimes, it is good to give. Philanthropic feelings and generosity will help you give unlimited number of people up to $13,000 each. Furthermore, you don’t have to worry about gift tax or estate tax ramifications. With funds allowing, you might want to consider utilizing the new $5 million per person lifetime gift exemption by making large gifts. This exemption and a 35% tax rate are both under the 2010 Tax Relief Act, and are in place in 2011 and 2012.

However, according to Miguel Farra, principal-in-charge of the Tax and Accounting, Department at CPA and advisory firm Morrison, Brown, Argiz & Farra, this provision is scheduled to be adjusted to $ 1 million and a 55% rate in 2013. In case you opt to share your bucks with charity, you are free to do so. However, you should watch out for fake organizations. You can visit charity websites to access more information on registered and legitimate organizations to help during the holiday season.

2. Give Your Stuff Away

It is not only money that is dispensable, but also other basic needs like clothing, household goods you rarely use, that toy that your grown up kid no longer requires, or anything else that has been lying around your house. The IRS accepts deductions for the fair market value of all non-cash contributions that are still in good condition. Please note that if you intend to make a large than normal contribution to your favorite charity, you should strive to do that before December 31. This will help you lower your taxes this year.

Do not forget to ask for a receipt from the organization you are donating to and keep it intact with your tax records. You will need a qualified appraisal with your tax returns if you opt to give away an item worth more than $5,000. On the other hand, you may opt to get rid of your old television set since you have a new one by giving it to a for-profit resale store or even sell it on a consignment basis. If you take this route, the IRS will not view that as a deduction.

3. A Charitable Loophole Just for Seniors

Seniors can actually reap tax benefits even without itemizing. Many senior citizens would not receive any tax benefits for their donations to charitable organization because they do not have Mortgage interest to pay and do not have enough deductions to itemize.

However, Joseph Arena, Brighton Securities’ director of tax and business services, quips that those over 70½ years old can still channel directly to a charity, tax-free part, or all of their required minimum IRA distribution (up to $100,000). By doing this, they still the reap the tax benefits of not reporting the donated distribution as income is still enjoyed, even if they are not itemizing their deductions.

4. Boost Your 401(k) Contribution

You might consider your 401(k) contribution if your budget allows for it and you have enough in cash savings set aside for emergencies. A contribution of up to $16,500 of your earnings-tax free is allowed.
This is in addition to any company matching. This limit shoots to $22,000 once you hit 50 years. In case you still don’t have a 401(k) at work, it is time you considered setting up an IRA or Roth IRA. The self-employed can shelter as much as $49,000 per year in a SEP-IRA, if their cash flow allows it.

Whatever you earn for your golden years will depend on the amount you put into these retirement funds, which will result into less taxes for you now. Every buck you pay in taxes today is a dollar that can’t be invested for growth. Did you know that in most cases, assets held in a 401(k) or IRA are safe from creditors’ claims? Mmhh, now you know.

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Tax Help: Retirement Account Options for the Self-Employed

September 29, 2011 By

The appetite for business ownership is highest now than it has ever been in the United States. According to statistics from the Kauffman Foundation, every month in 2010, there were about 565,000 Americans who made the bold move of becoming their own bosses. In fact, there were more businesses set up in 2010 that there have been in the last 15 years. The business boom has been brought about by many reasons. From reduced job security, high unemployment, low interest rates on loans, stimulus package opportunities, to success stories of overnight internet billionaires, there are many reasons that are pushing more individuals to venture in the world of self employment.

Running your own business can be very rewarding – you are your own boss and you can finally do what you really love. However, there is a downside to becoming self-employed. Some of the things you took for granted while employed are no longer automatically available. Many people who leave employment to start out their own businesses either ignore or procrastinate in setting up some of these important things, such as a retirement account. People in business put all their energy and finances into their business in a bid to have it grow towards success. However, it is important to be prudent and set aside money for retirement – no matter how hard it is. This way, you will have a fall-back when you retire from business, no matter how the business goes. There are also tax saving retirement options available for business people and you can invest in one of these to save on taxes.

SEP IRA

The SEP IRA account is a flexible retirement account that allows you to save funds, depending on your business performance. In the years that you perform well, you can save up more. For bad years, you can save little to no retirement funds. This account enables you to save up to 25% of your net self employment income with a cap of $49,000.00 for the 2011 tax year. You can therefore, wait until year end after making your final accounts so as to determine the amount to put into your retirement account. This account is ideal for start-ups and businesses that run without employees, but may be limiting for businesses with employees. This is because for businesses that have employees, you will need to put aside a similar percentage for all your permanent employees.

SIMPLE IRA

The savings incentive match plan for employees (SIMPLE) is an ideal retirement account to run for businesses that have few employees. The account is only available for businesses with less than 100 employees. For the 2011 tax year, this account allows for a tax-free contribution of $11,500.00 for those below 50 and $14,000.00 for those who are 50 years and above. The contributions and the growth of the retirement account is tax-free while the withdrawals are taxed on retirement.

Solo 401k

This product is only available to self-employed individuals and their spouses and not employees. It has higher caps as compared to IRA accounts and therefore, ideal for a businessperson who is able to save a larger percentage of their incomes towards retirement. The total tax-free contribution for this account is $54,500.00. The account also allows for flexible saving. Thus, one can save more in a successful year as compared to the leaner years. This account also enables those who leave employment to go into business to change their employment 401k account into a Solo 401k. Another advantage of this account over IRA accounts is that there are options for Roth accounts that allow you to save after tax and withdraw your funds tax-free on retirement.

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