The Thomas Law Firm, Chartered

NEW RULES FOR INHERITED IRAS

 

For those intending to leave and individual retirement account (IRA), there are new roles on how quickly you must withdraw the money. You do not want to make mistakes in withdrawals from an inherited IRS because the IRS can levy a 50% penalty on whatever amount it says you should have withdrawn.

 

Spouses can still use the “stretch” IRA strategy, which sets annual required minimum distributions (RMDs) based on life expectancy. For everyone else here are the key rules for inherited IRAs:

 

You do not have to withdraw money each year. All that matters is that the account is empty at the end of the 10^th year following the year the original owner died. That said, if it is a sizable amount in a traditional IRA, you should consider taking money out over a number of years.

 

If the deceased had a required minimum distributions (RMD) due for the year of his/her death, the beneficiary must take the distribution. Failure to do that can result in a penalty of 50% of the amount that should have been withdrawn. Anyone who is at least 72 years old must take the annual RMDs from traditional IRAs.

 

Beneficiaries should empty Roth IRAs within 10 years. You can withdraw contributions the owner made at any time tax-free. Earnings are taxable if the account was set up by the deceased less than five (5) years before death. In that case, the beneficiary should wait until the account hits the five-year mark before considering withdrawing earnings.

 

Some non-spouse beneficiaries may be able to use the old RMD method. If the beneficiary meets the IRS definition of being disabled or chronically ill, RMDs based on life expectancy are allowed. The same is true of beneficiaries who are within 10 years of the age of the deceased. Minor children can also take RMD’s until they reach the age of maturity-typically age 18-at which point the 10 year rule kicks in. Grandchildren are held to the 10 year rule.

 

If the IRAs inherited by an estate or trust, there are different rules. If the deceased was not yet taking RMD’s, the account must be fully withdrawn within five years. If the deceased was taking RMDs, withdrawals can continue to be made using the RMD method.

 

Every dollar you withdraw from a traditional IRA is taxed as ordinary income. If you inherited a sizable IRA, we recommend consulting your tax professional to plan a withdrawal strategy over the allowed time period to minimize your tax bill. For non-spouses, it might may be wise to spread withdrawals over multiple years within the 10 year window.

 

If you inherit a Roth IRA and do not need the money anytime soon you might consider waiting until late in the 10^th year to move the money. That way you can enjoy a decade of tax-deferred growth before you must move the money to a taxable account.  Withdrawing the money from a Roth IRA should not trigger a tax bill but all of the money must be withdrawn.

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Why It’s Been 31 Years Since the Last Tax ReformSources: Inside.gov & Internal Revenue Service

President Donald Trump has promised the most comprehensive overhaul of the tax system since 1986. That was when a Republican president joined forces with a Democratic House of Representatives and a Republican Senate to lower personal income-tax rates and simplify a messy and outdated tax system.

Today, Republicans control both houses of Congress as well as the White House. Democrats agree with them that the system has once again become messy and outdated. So in theory it should be easier to reach agreement now than it was then.

Forget that theory. Passing tax reform this year will be a much tougher slog than it was 30 years ago, or than Republicans expect it to be today.

Republican opposition would have doomed President Ronald Reagan’s plans without Democratic support, and the bipartisanship and skilled political leadership needed to push them through don’t exist today.

Thus while a sweeping tax-reform bill is a top priority of both Trump and House Speaker Paul Ryan, with a goal of passing it by July, the odds are that it won’t happen. A look at what took place in 1986 helps explain why.

The architect of the 1986 tax bill was a Democratic senator, Bill Bradley, who was a relentless and effective advocate. The concept was embraced and proposed by Reagan, who delegated the responsibility for getting it through to Jim Baker, the most politically skillful Treasury secretary of modern times, and his brilliant deputy, Richard Darman, a genius at navigating the intersection of policy and politics.

On Capitol Hill, the chairmen of the two tax-writing committees surprisingly rose to the occasion. The Democratic Ways and Means Chairman Dan Rostenkowski transcended his roots as a Chicago machine politician to become a national legislator. Senate Finance Committee Chairman Bob Packwood stopped defending tax benefits tailored for some of the business interests he and other Republicans had faithfully championed.

The result was a comprehensive bill that slashed individual and corporate rates while compensating for the lost revenue by closing loopholes. That meant eliminating tax advantages enjoyed by powerful interest groups like the oil and real-estate industries and overcoming their formidable allies in Congress.

On the way, the 1986 tax bill nearly died on multiple occasions as lobbyists pressed their cases. Throughout almost two years of debate and negotiation, the conventional wisdom was that the proposal would not survive. It was defeated once in the House. The Senate, with Democrats and Republicans equally beholden to special interests, appeared to be a certain graveyard.

Then, as the bill reached final passage, Senate Republican Leader Bob Dole marveled that in a matter of days, it went from “immovable to unstoppable.” It cleared the Senate by 97 votes to 3. A combination of will, skill and ideological flexibility made it possible.

For example, conservatives got the lower individual rates they favored by giving liberals something they wanted: stiff increases in corporate taxes (something Reagan chose not to talk about in public). Liberals suppressed their horror at the idea of a 28-percent rate for wealthy people (down from 70 percent just six years earlier) because conservatives overcame their fears about constraining economic growth.

Today, that spirit of horse-trading is gone. Many Republicans are dead-set against raising any taxes, even if needed to offset cuts elsewhere. Some Democrats are unbending on reducing high U.S. corporate tax rates despite widespread agreement that they are counterproductive. It’s hard to see why either side would give ground.

The Trump administration’s tax-reform effort, for now, is being guided by a top White House economic adviser, Gary Cohn. Until a month ago he was president of Goldman Sachs Group Inc., and undoubtedly is knowledgeable about taxes. When it comes to Washington politics, though, he’s no Jim Baker.

In Congress, Paul Ryan is a committed tax-policy wonk, as are a number of other Republican leaders. At this stage there is no Democrat who might be a Bradley or Rostenkowksi. In the Senate, Finance Committee chairman Orrin Hatch, who once worked across the political aisle, has become an aging partisan, lacking the dexterity Packwood displayed.

The reason personal heft matters so much is that tax reform is so hard. It directly affects as many, if not more people, than a health-care overhaul. By definition, there are winners and losers — somebody gets something at somebody else’s expense. The losers always feel more passionate and make more noise.

“Doing major tax reform with familiar income or consumption taxes has proved remarkably difficult — even when everyone agrees that reform is necessary,” notes Michael Graetz, a Columbia Law School professor and former Treasury Department tax official who has written extensively on the issue.

The machinations Republicans are starting to go through attests to that wisdom. Ryan says the final product won’t reduce government revenue and Treasury Secretary Steven Mnuchin says the wealthy won’t get a net tax cut. Those claims are overtures to moderates. But given Republican fondness for lowering rates, especially for the wealthiest taxpayers, neither result is likely.

Republicans envision a new sales tax on domestic and imported goods and services dubbed a “border adjustment tax,” a variation of a European-style value-added levy that would favor exporters like Boeing and Caterpillar over equally powerful consumer-product companies like Wal-Mart and Target, not to mention consumers themselves. There’s economic merit to the idea since it would raise money to enable rate cuts and avoids the crude protectionism that Trump has championed.

But it would create a big new tax, and already some House conservatives are objecting. So has the right-wing advocacy group Americans for Prosperity, which was founded by the Republican mega-donors Charles and David Koch.

Politics aside, Graetz, who’s supported a form of a value-added levy, warns that the border-tax idea proposes “a unique tax used nowhere in the world with big but uncertain economic effects, which certainly will produce major legal challenges both here and from our trading partners.”

Thus, concludes Len Berman of the Tax Policy Center, “The theory of this tax looks good but the politics may prove impossible.” U.S. retailers already are rallying in opposition.

Another source of revenue could be a special lower rate on corporate income from foreign sources intended to allow companies to invest that money in the U.S. instead of banking it abroad to avoid high corporate taxes. Perhaps Democrats could be brought on board by a promise to use some of the resulting revenue to finance infrastructure improvements, as Trump has promised to do.

But those revenues would be temporary while the tax cuts, Ryan insists, would be permanent. Democrats, skeptical of cutting any deal, sense a trap where Republicans subsequently would come back with big spending cutbacks to make up for the deficits.

It may not be that tough for Republicans to cut taxes, mainly on a party-line vote. But as they struggle to pass comprehensive tax reform by this summer, expect sometime this spring for them to start wondering: Where are Bill Bradley and Jim Baker?

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STATEMENTS TO IRS & BENEFICIARIES REGARDING BASIS REPORTING POSTPONED UNTIL JUNE 30, 2016

 

IRS has again delayed the initial due date for providing statements to IRS and

to beneficiaries, under the rules requiring consistent basis reporting for estate

tax and income tax purposes, this time until June 30, 2016. (Notice 201627,

201615 IRB 1)
Background. The executor or administrator of a decedent’s estate must file

the estate tax return. (Code Sec. 6018(a))

 

If the executor or administrator is unable to make a complete return with

respect to any part of the gross estate, he must include in his return all the

information he has, including a description of such part and the name and

address of every person holding a legal or beneficial interest in such part. If

they are notified by IRS, such legal or beneficial owners must then file returns

as to their parts of the estate. (Code Sec. 6018(b))

 

On July 31, 2015, President Obama signed into law the Surface

Transportation and Veterans Health Care Choice Improvement Act of 2015

(P.L. 11441;the Act). Section 2004 of the Act enacted Code Sec. 1014(f) and

Code Sec. 6035).

 

Under the Act, effective for property with respect to which an estate tax return

is filed after July 31, 2015, the basis of any property to which Code Sec.

1014(a) (i.e., the rules for determining basis of property acquired from a

decedent) applies can’t exceed:

 

(A) In the case of property, the final value of which has been determined

for purposes of the estate tax on the estate of the decedent, such value.

(B) In the case of property not described in (A), above, and with respect

to which a statement has been furnished under new Code Sec. 6035(a)

(see below) identifying the value of such property, such value. (Code Sec. 1014(f)(1))

 

Code Sec. 6035 imposes new reporting requirements with regard to the value

of property included in a decedent’s gross estate for federal estate tax

purposes.

 

Code Sec. 6035(a)(1) provides that the executor of any estate required to file

an estate tax return under Code Sec. 6018(a) must furnish, both to IRS and

the person acquiring any interest in property included in the decedent’s gross

estate for federal estate tax purposes, a statement identifying the value of

each interest in such property as reported on such return and such other

information with respect to that interest as IRS may prescribe.

 

Under Code Sec. 6035(a)(2), each person required to file a return under

Code Sec. 6018(b) must furnish, both to IRS and each other person who

holds a legal or beneficial interest in the property to which such return relates,

a statement identifying the information described in Code Sec. 6035(a)(1).

Code Sec. 6035(a)(3)(A) provides that each statement required to be

furnished under Code Sec. 6035(a)(1) or Code Sec. 6035(a)(2) must be

furnished at such time as IRS may prescribe, but in no case at a time later

than the earlier of: (i) the date which is 30 days after the date on which the

return under Code Sec. 6018 was required to be filed (including extensions, if

any); or (ii) the date which is 30 days after the date such return is filed.

Previous delays. Notice 201557, 201536 IRB 294, provided that, for

statements required under Code Sec. 6035(a)(1) and Code Sec. 6035(a)(2)

to be filed with IRS or furnished to a beneficiary before February 29, 2016,

the due date under Code Sec. 6035(a)(3) was delayed to February 29, 2016.

Notice 201619, 20169 IRB 362, provided the same rule, except with

March 31, 2016 substituted for February 29, 2016.

 

And, in temporary regulations issued earlier this month,

IRS reiterated the March 31, 2016 date by saying

that executors and other persons required to file or furnish a statement under

Code Sec. 6035(a)(1) or Code Sec. 6035(a)(2) before March 31, 2016, need

not do so until March 31, 2016.

 

IRS announces second delay.

 

IRS has now announced that statements

required under Code Sec. 6035(a)(1) and Code Sec. 6035(a)(2) to be filed

with IRS or furnished to a beneficiary before June 30, 2016 need not be filed

with IRS and furnished to a beneficiary until June 30, 2016.