If you are approaching retirement age, you should begin to consider when to take distributions from your qualified plans and IRAs. In addition to the IRS’s restrictions on when you can start taking money from your retirement accounts, there are additional requirements concerning distributions you must take. The Internal Revenue Code requires you to withdraw a certain amount each year so that it can tax a certain minimum amount each year.
Why am I required to take distributions?
The distribution requirements were established to prevent you from accumulating funds tax free indefinitely. In the case of a qualified plan in which you participate, you are required to begin taking at least minimum distributions starting April 1 of the year following the year in which you reach age 70 1/2 or retire, whichever is later. In the case of your IRAs, you must begin distributions starting April 1 of the year following the year in which you turn 70 1/2, regardless of whether you have retired.
How much must I take out?
If you have enough other assets for your support, you probably want to minimize distributions from your retirement plans so that your plan assets can continue to accumulate tax-deferred as long as possible. The detailed workings of the required minimum distribution (RMD) rules are contained in IRS regulations issued in 2002 and 2004, and fine tuned later by further guidance. These regulations go far beyond the Internal Revenue Code provisions in providing the details that are needed to determine an RMD. Thus, as a practical matter, the regulations must be consulted when calculating an RMD. While voluminous, they required a calculation that is much more favorable to taxpayers than had previously been the case. (If you have a Roth IRA, the news is even better. Since contributions to a Roth IRA are the result of after-tax dollars, no tax is generally due on distribution after retirement age, and there is no requirement that you distribute your account balance according to any particular schedule.)
The minimum amount that must be distributed from your retirement accounts depends on your life expectancy, or the joint life expectancy of you and your spouse if your spouse is more than 10 years your junior. If the required amounts aren't distributed, a 50-percent excise tax is imposed on the amount that should have been distributed but wasn't.
In order to determine the amount of the minimum distribution you must receive for a year, you must locate your current age on one uniform table each year to obtain the updated number of years over which your benefits are expected to be paid. That number will then be divided into your account balance as of the end of the previous year to give you the amount that must be distributed to you for the current year. The table you will use is the same table that will be used by all retirement plan participants to calculate their required distributions. (In the only exception to this uniformity, a participant whose spouse is more than 10 years younger may use the old joint and last survivor table to stretch out and reduce annual payments even more.)
At the same time you are arranging your post-retirement finances, you can also incorporate some estate planning. Along with simplification in calculating your benefits, the recent rule changes will also bring greater flexibility and opportunity in the designation of your beneficiaries. You may now change beneficiaries as often as you like before your death, and it will not affect the amount of your annual contributions (unless, of course, you are moving into or out of a beneficiary relationship with a spouse more than 10 years younger). And if your heirs are faced with changed conditions following your death, there is an opportunity for them to rearrange your pre-death beneficiary choices so they can accommodate the new conditions.
If you would like to make sure your spouse's financial needs will be taken care of after your death, but you would also like to let your assets continue to accumulate on a tax-deferred basis and eventually provide an inheritance for your children or grandchildren, you should name your spouse the primary beneficiary and your younger heirs the secondary beneficiaries. If your spouse doesn't need your retirement plan assets for his or her support after your death, he or she has until the last day of the year that follows the year of your death to disclaim any interest in your account assets. This allows that amount to pass directly to your younger beneficiaries, over their longer life expectancy, as if your spouse had never been named a beneficiary at all.
After your death, your remaining plan assets will be paid to your beneficiary over his or her lifetime (unless you or your plan provide for a shorter distribution period). If you die before naming a beneficiary, but after the date the IRS says you must begin distributions from your plan, your remaining plan assets will be paid out over a period equal to your life expectancy immediately before your death unless your plan calls for a shorter period. If you die before that date without having named a beneficiary, your plan assets must be paid out within five years of your death.
Working within the distribution rules, you must make decisions about your post-retirement finances and planning your estate. If you want to know more about the rules and how they will work best in your situation, please don't hesitate to call our offices.
The Tax Code allows you to deduct expenses that you may incur for searching for a job in your field. Some of these expenses may be obvious; others are not. The deduction may be especially valuable in today's tight job market. This letter describes those expenses.
The costs of typing and printing your resume are valid deductions. Postage and long distance telephone calls can be deducted. The cost of travel to a job interview can be deducted. Here, it is important to remember that the auto mileage expense changes every year. For 2012, it is 55.50 cents-per-mile. Air or rail fare also can be deducted. If you utilize the services of an employment agency, that cost can be deducted, as can the costs of job counseling and referral services. Remember to keep records of all these costs because although some may be minor, together they may add up to a significant amount. It does not matter if your job search is successful or not.
However, the above deductions cannot be taken if you are searching for a job in a new field. For example, a professional photographer who seeks to change his or her career path and pursue a new job in the health care industry cannot deduct any of his or her job-hunt expenses.
Just what constitutes a "new field" is not necessarily intuitive; the IRS has held that different types of jobs in the same employment sector are jobs in different fields and job search expenses were not deductible. Exceptions to this rule do apply, however. The IRS allows retired servicemen and women to search for jobs in new fields and still claim these job-search deductions. And temporary jobs you take while searching for permanent employment in your field will not affect the deductibility of your job search expenses.
Persons, such as college students, entering the job market for the first time cannot deduct their job-search expenses. If, however, a college student has worked in his or her chosen field while attending college, post-college job search expenses may be deductible. If a jobseeker has been out of the workforce for a long period of time, the costs of searching for a job are not deductible. This rule may particularly affect parents who take time off work to raise their children.
Job-search expenses are itemized deductions. You can deduct job search expenses as long as the amount of all of your miscellaneous itemized tax deductions is more than two percent of your adjusted gross income (AGI). If you take the standard deduction, you cannot claim them.
Medical Expense Deduction for Weight-loss Programs
Many people are unaware that the cost of weight-loss programs may qualify as a deductible medical expense when used to treat obesity or hypertension. The deduction is especially valuable for people with flexible spending accounts (FSAs). If your weight-loss program qualifies as a "deductible medical expense," you can pay for it with the pre-tax dollars you allocate to the medical expense portion of your FSA each year.
For many years, the IRS allowed people to deduct the cost of weight loss programs only if the patient had to lose weight as part of his or her treatment for another disease. Obesity, in and of itself, was not considered by the IRS to be a disease. The rationale was that many people lose weight merely for cosmetic, and not health, reasons. That's true, but not for everyone.
Some time ago, the IRS signaled it was changing course when it determined that people could deduct the costs of smoking-cessation programs. In addition, the costs of treating alcoholism and drug addiction were deductible. In both cases, the patient had to be directed by his or her physician to stop smoking or get help for alcoholism or drug addiction. Now, the cost of treating obesity is added to the list.
The IRS provided some examples. Both scenarios involve participation in weight-loss programs. Both taxpayers paid fees for admission into the programs and to attend periodic meetings. They also bought diet plans and booklets. One of the two received a diagnosis of obesity. The other person was diagnosed as suffering from hypertension partially caused by being overweight. Both participated in their programs as treatment for these medical conditions.
The IRS ruled that these two people can take deductions for the costs that are related to their weight-loss programs. However, the cost of buying reduced-calorie diet foods cannot be deducted since they are substitutes for normal living expenses.
If you plan on taking a medical deduction, the relevant costs can be deducted as an itemized medical expense deduction only if they are paid out-of-pocket and if they are neither compensated nor reimbursed (including through a flexible spending plan). Also, the amount of such costs that you can deduct have to be in excess of 7.5 percent of your adjusted gross income (10 percent for 2013 and beyond, unless the taxpayer or spouse is age 65). Also note that because of the Health Care Act, withdrawals from a medical flexible spending account starting in 2013 is limited to $2,500 for the entire year.
Keep in mind that there are still some unanswered questions. When does overweight end and obesity begin? How much overweight is needed to affect hypertension and to what level must hypertension reach in order to justify deductible weight-loss treatment? Does weight-loss include an exercise program, even though the IRS mentioned nothing in its ruling about exercise as a weight-loss treatment? Does a deductible exercise program include a heath club membership or an expensive home treadmill? Taxpayers have yet to test these questions on the IRS.
If you or a family member has considered entering a weight-loss program, please feel free to check with this office on whether your costs might be defrayed through a tax break. Creating a file in which you keep doctor's notes, bills and progress logs could also be important.
Finally, if you or a family member has undergone the expense of a weight-loss program within the past three years, you might want this office to check whether you ought to file an amended return to claim a tax refund.