Advanced Underwriting Consultants

Ask the Experts – March 31

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client failed to take his RMD last year. What’s the penalty for failure to take an RMD, and is there any way to have the penalty waived?

Answer: The penalty is 50% of the shortfall in the amount of distributions. For example, if your client was required to make a $5,000 distribution in 2013 but failed to take a distribution at all, the penalty tax is $2,500 (50% of $5,000). This penalty is reported on Form 5329 and Form 1040, line 58.

The IRS can waive part or all of the 50% penalty if he can show that the shortfall was due to reasonable error and that he is taking reasonable steps to remedy the shortfall.

To have the penalty waived, your client should first take the 2013 RMD this year. Keep in mind that this distribution is still in 2014, meaning taxes are due on the distribution for the 2014 taxable year. Also note that the taxpayer still needs to take his 2014 RMD by December 31 of this year.

Next, your client should fill out Form 5329, Part 8, as normal with one exception. On line 52 (where the shortfall would normally be calculated), he should enter “RC” and the amount of the RMD that he wants waived in parentheses. He should then subtract the amount he wants waived from the amount of the shortfall, and fill in line 52 with that number. It will be $0 if he’s requesting the full RMD waived. Next, he should fill in line 53 as normal.

Here’s what it would look like assuming the RMD was $5,000, and he is requesting a waiver of that full amount:

50  Minimum required distribution for 2013       .  .  .  .  .  .  . . .  .  .  $5,000

51  Amount actually distributed to you in 2013  .  .  .  .  .  .  .  .  .  .  .  .  .  . -0-

52  Subtract line 51 from line 50. If zero or less, enter -0- (RC $5,000) .  . -0-

53  Additional tax. Enter 50% of line 52      .  .  .  .  .  .  .  .  .  .  .  .   .  .  .     -0-

In addition to filling out Form 5329, your client must attach a “statement of explanation” showing that the shortfall was due to reasonable error and that he remedied the shortfall (or is in the process of remedying the shortfall).

The bottom line is that to ask for a waiver, your client should take the 2013 RMD as soon as possible, file Form 5329, and attach a statement of explanation.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.