Advanced Underwriting Consultants

Question of the Day – August 31

Ask the Experts!

Here’s the question of the day.

 

Question: My client intends to make a contribution to a Roth IRA for 2011 in April of 2012.  If it turns out the client earned too much in 2011, can the contribution be applied to calendar year 2012?

Answer: Yes, assuming the client qualifies to make a Roth IRA contribution for 2012.

 

In the case of a traditional IRA, contributions made between April 16 and December 31 of a calendar year are assumed to be contributions made for that calendar year. On the other hand, traditional IRA contributions made between January 1 and April 15 may be a contribution for either that calendar year or the prior calendar year. The taxpayer must indicate on the form submitted to the IRA custodian to which year the contribution applies.

 

Here’s an example. On December 1, 2010, Sally made a traditional IRA contribution of $3,000. On January 5, 2011, Sally made an additional contribution of $3,000 and reported to the IRA custodian that this was a 2010 contribution.

On April 15, 2011, Sally filed her 2010 Federal Income Tax Return and took a deduction of $6,000 for an IRA contribution.  Some time later (but in no case later than May 31) the IRA custodian issued a Form 5498 with copies to both the taxpayer and the IRS indicating Sally made $6,000 in 2010 traditional IRA contributions.

 

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.

Question of the Day – August 30

Ask the Experts!

 

Here’s the question of the day.

Question: Does an UGMA or UTMA account have special tax rules similar to an IRA or 529 Plan?

 

Answer: No.

For the most part, UGMAs and UTMAs don’t have any special tax rules; the accounts are merely a way of holding property, not a separate tax entity. Unlike 529 Plans and IRAs, there is no tax deferral. If an UGMA or UTMA owns a bank CD, the minor would have to report and pay tax on interest earned each year. If the account owns stocks or mutual funds and trades or sells them, tax would be due on any capital gains in the year of the sale or trade.

On the other hand, if the account owns a non-qualified deferred annuity (NQDA) and does not take a distribution, there is no taxation of earnings inside the contract. Likewise, if the account holds stocks and does not sell or trade them, there’s no current taxation.

The use of UGMA or UTMA assets does not affect taxation. For example, income earned by the account and used for college expenses is still subject to income taxes, unlike a 529 Plan. But the account is not subject to special penalties either; withdrawal from the account will incur no special penalty if the money is used for non-education purposes or prior to age 59 1/2 as in the case of, respectively, a 529 Plan or an IRA.

The UTMA or UGMA account gives no protection from penalties otherwise due. For instance, if the account holds a NQDA and money is withdrawn, the earnings portion will be subject to the 10 percent penalty for distribution prior to age 59 1/2. The fact that it’s in a custodial account offers no exemption from the penalty. This fact should be carefully considered prior to using a NQDA in an UGMA or UTMA.

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.

Question of the Day – August 29

Here’s the question of the day.

Question: My client is 73, and has a substantial IRA balance.  She wants to make a transfer from her IRA to a charitable gift annuity (CGA).  Will the transfer be subject to federal income tax?

 

Answer:  Yes.

Charitable IRA Rollover first became available under the Pension Protection Act of 2006.  That Act made it possible for IRA owners over the age of 70-1/2 to transfer up to $100,000 per year from their IRAs directly to a public charity without having to report it as taxable income.  In addition to not being included in taxable income, the amount transferred did count towards the Required Minimum Distribution (RMD) for the account owner.

The Charitable IRA Rollover opportunity has been extended multiple times, but it is currently scheduled to expire at the end of this year.

 

Here are the requirements for doing a Charitable IRA Rollover:

 

  • · The IRA owner must be age 70-1/2 or older on the date of the gift.

 

  • · The gift is limited to $100,000 per taxpayer per year.

 

  • · The gift must be made directly from the IRA custodian to the charitable organization.

 

  • · The gift must be made to a public charity and may not be made to a donor advised fund or supporting organization.

 

  • · The gift must be a current outright gift and the donor may receive no benefits in exchange for the gift (i.e. no gift annuity).

 

  • · The gift must be made from IRA funds that would have constituted taxable distributions.

 

In this case, the proposed transfer is for a gift annuity, rather than directly to a charitable organization, so the direct transfer is not allowed.  If the taxpayer proceeds with the CGA, she will pay tax on the entire amount of the distribution, and may have a partly offsetting tax deduction for the charitable gift.

 

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.