Advanced Underwriting Consultants

Question of the Day – February 23

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 and her minor children are receiving Social Security survivors’ benefits.  If my client has taxable income this year, will it make the survivors’ benefits taxable?

Answer: Yes, possibly.  Up to 85% of survivors’ benefits, like Social Security retirement benefits, are potentially income taxable.

If kids are entitled to survivors’ benefits under Social Security, the income is considered to be theirs.  Any tax result on the benefits will depend on their own other taxable income.  For most minor children, that means their survivor’s benefit will be tax free.

Likewise, a surviving spouse’s benefit under Social Security is potentially taxable depending on her own other taxable income.  If an unmarried surviving spouse adds up half her Social Security benefit plus other taxable income, if the result is greater than $25,000, then at least part of the survivor’s benefit will probably be income taxable.

IRS Publication 915 gives a worksheet to calculate how much of the benefit is taxable.

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 – September 25

Ask the Experts!

Here’s the question of the day.

Question: I have a client who has been receiving “substantially equal payments” from her IRA since she has been age 50.  I am proposing setting her up in an immediate annuity with part of her IRA that will pay her the exact same amount she is getting now for a 5 year period which will take her beyond age 59 1/2.  Will this still qualify under the “substantially equal payments” rule?

Answer: There’s not a 100% certain answer to the question, unfortunately.

The proposed action makes logical sense, and seems consistent with the spirit of the 72(t) “substantially equal series of payments based on life expectancy” exception.  However, there is some troubling language in Revenue Ruling 2002-62, which the IRS could apply to the situation in an adverse way.

Here’s the language from the Revenue Ruling:

a modification to the series of payments will occur if, after such date, there is

(i)              any addition to the account balance other than gains or losses,

(ii)            any nontaxable transfer of a portion of the account balance to another retirement plan, or

(iii)      a rollover by the taxpayer of the amount received resulting in such amount not being taxable.

An annuitization of a portion of the account might be considered a “nontaxable transfer of a portion of the account balance,” invalidating the entire set of 72(t) distributions.  It’s not clear that the IRS would decide that way, but we can’t predict for sure.

The only way to get a sure opinion is for the client to ask for a private letter ruling.  The second best way is for the client’s CPA to think over the issues, review my analysis above, and decide that the CPA is comfortable with the client taking the tax risk.

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.