Category Archives for "Tax Strategies"

Exceptions to Early Distributions from A Retirement Plan

The Internal Revenue Service website,, has recently posted an informative summary table of the kinds of distributions that are currently subject to an additional 10% excise tax due to early withdrawals of retirement plan funds.  For convenience, the table is reposted here. Withdrawal of funds prior to reaching an age of 59 1/2 are categorized as premature and subject to a penalty unless an exception is noted at the time of distribution.  The characterization of this distribution is coded in Box 7 of the IRS Form 1099R sent to both the IRS and the individual to whom the distribution is paid.  Note in this table below that 457(b) distributions are an exception.


Note that this particular page was last reviewed June 17, 2013 above.  There are other timely topics pertaining to retirement plan operation, internal controls, and information particularly relevant to employees covered in this particular issue. Consider the HTML version of Retirement News For Employers August 20, 2013 Edition here for other important and current references related to retirement plans.


5 steps help when dealing with the IRS

If you prepare income taxes, by now you have probably heard that the Internal Revenue Service (IRS) has postponed the retirement of both eServices supporting Disclosure Authorization (DA) and Electronic Account Resolution until September 2, 2013. Both services are critical in helping tax preparers support their clients’ needs throughout the year.

1) Plan your phone call carefully. Even though the Practitioner Priority Service (PPS) posts availability Monday thru Friday from 0700 am until 0700 pm (local time), you probably know or suspected there are optimal times to call like 0700 AM Tuesday thru Thursday. Remember you can call about more than one client at a time! When the PPS voice says they will only help you with one client ‘issue’, cite IRM of the Internal Revenue Manual, “CSR’s should limit the practitioner to no more than five (5) clients per call.”

2) Prepare your case file. Aside from having your client’s information in clear view for a quick response, make sure you have your company data in front of you. Be prepared to fax consent documentation as soon as the PPS agent provides you with their fax number. Always fax your documents directly to the Centralized Authorization File (CAF) unit.

Ask the agent about pending transactions, deadlines, and clarification of “adjustments” while the meeting is taking place. Some of this information may not be on a transcript. Complete your call by requesting all relevant transcripts that will help you after you finish your phone call.

3) Work smart. You all know the difference between the IRS Form 8821, Tax Information Authorization, and a power of attorney. Leverage this document to obtain information that will help build your case file by having a administrative assistant (other than CPA, EA, or attorney) call PPS and seek the relevant information or transcripts. By combining this step with the ‘five (5) clients per call’ per IRM citation noted above, a temporary assistant working Tuesday morning can gather lots of preparatory or background information while you focus on more productive activities.

4) Think proactively. Depending on your client, you might consider either submitting IRS Form 2848, Power of Attorney and Declaration of Representative for some of your clients at tax prep time or confirming you have one on file. Incorporate this step whenever you have:

  • New clients with ‘history’
  • Clients with an ‘expensive return’ (that is, for example, large and disposable income)
  • Tax returns with carryforwards, NOLs, etc.
  • Entity returns

5) Put yourself in the loop. Make sure your client understands and completes IRS Form 8821 so that you (or your company) have continued access to your client’s information and receive the same IRS notices your client does.


Takeaways –

If you are a tax preparer, did you confirm receipt of any authorization letters you have sent the CAF unit?
Did you clarify your deadlines before you hung up?
Did you make sure there are no ‘other’ issues or IRS letters still pending?

Defense of Marriage Act (DOMA) changes tax rules

IRS Guidelines For 2013

When the US Supreme Court struck down parts of the Defense of Marriage Act, commonly known as DOMA, significant changes occurred in the federal filing status for some people in this country.  There is a major difference in tax calculations between filing as Single and filing as Married Filing Jointly (MFJ). Same-sex couples who are legally married can now change their filing status to reflect their marital status. The federal tax return now agrees with the way some states like California reported Registered Domestic Partners (RDPs). If a married couple lives in California, they can now list themselves on both the federal and state tax returns as married.   It is not clear, however, whether the California RDP designation is considered the same as a married couple on a federal tax return.  Ambiguities especially reconciling state and federal definitions remain even before the IRS releases guidance that will hopefully clarify tax issues relating to the prior year tax filings.

Despite the often cited “marriage penalties” especially when both partners have earned income, the MFJ filing status offers tax advantages. In general terms, the standard deduction for a married couple is double that of a single person. The IRS has not officially stated how the recent DOMA decision will affect federal income tax filings retroactively.  Couples who were legally married in a prior year should nevertheless consider amending prior year federal returns for possible refunds still available under the statute of limitations. In the case of California, the IRS allowed amended federal tax returns for prior years in order to determine community property issues pertaining to RDPs ruled by the state.

Calculate tax brackets and various floors and thresholds when to determine the lowest possible tax calculations.

There are parts of the DOMA decision that extend far beyond a fundamental determination of filing status. Recognition of marriage for all couples affects retirement plan payments, estates, and gift tax, as well as social security benefits. Many new possible tax strategies are available now that both opposite- and same-sex couples share the same filing status and potentially change how contributions and distributions can be handled.  Given the way the IRS managed changes in community property matters reported retroactively in, for example, California, guidance and clarification of tax treatment from the IRS is highly anticipated.

It is probably safe to make simple extensions of the Internal Revenue Code to new areas of tax reporting.  For example, the IRA surviving spouse beneficiary of a same-sex married couple has the same tax benefits as any other spouse; they can treat their deceased partner’s IRA as their own and postpone payouts up until required minimum distributions are due.  Similarly, when one spouse transfers assets to another or is left assets by their deceased spouse, property is not subject to taxation.  In addition, the portability election now applies between any married couple where, as of 2013, up to $10,500,000 USD in assets is excluded from estate or gift tax.

Determination and allocation of Social Security benefits are also affected by the DOMA decision.  Some benefits are determined by the earnings history of a spouse. It is not clear how the DOMA decision will be applied retroactively to qualified benefits for a divorced spouse. Many unaddressed issues remain especially in reconciling state rulings with federal statutes as well as between government agencies like the Internal Revenue Service and the Social Security Administration.  Following these recent changes in the DOMA, implementation of health care rules as stated(?) in the ‘evolving’ Affordable Care Act require greater clarity especially since tax preparers take decisive interpretive actions whenever they prepare an individual or couple’s personal income tax return. If the guidance is ambiguous or absent, how can they provide a timely and accurate service to their clients?

Other recent references to DOMA and about RDPs as of 28 July 2013:

Military Ready to Act in Response to DOMA Ruling – Hit & Run …
The Defense of Marriage Act prohibited the federal government from recognizing and extending benefits to same sex spouses. With the Supreme Court striking.

Life After DOMA: Same-Sex Marriage Fight Heads Back to the States …
One month after the Supreme Court struck down a crucial provision of the Defense of Marriage Act, gay Americans and the government alike are still sorting through the ramifications of the ruling — just…

Staver: SCOTUS DOMA Ruling Is Like Trying To Suspend The Law …
On today’s “Faith and Freedom Radio” broadcast, Mat Staver continued to directly compare the Supreme Court’s recent ruling on the Defense of Marriage Act to the Dred Scott ruling and other egregious court decisions from 

Tax Tips for Registered Domestic Partners and Same-Sex Couples …
As of 2012, the IRS follows DOMA – the Defense of Marriage Act – which only recognizes marriage between a man and woman. Domestic partners, therefore, can submit only individual 1040s; they cannot file jointly. How you handle 1040 forms 

Marital Deduction for Registered Domestic Partners after Windsor
California registered domestic partnerships may soon be converted into marriages for same-sex partners after a relatively short opt-out period as occurred in Washington state, where same-sex marriages not dissolved by