Inheriting an individual retirement account from someone other than your spouse can be a complicated process, and you might be tempted to procrastinate before tackling the tax rules. But knowing what you’re required to do can keep you from losing part of your inheritance to penalties.
Here are three actions to get started.
- Find out if the IRA owner was required to take distributions. The answer will affect how much you’ll need to withdraw from the account and the time period you have to make the withdrawals. In addition to any withdrawals you’re required to take as a beneficiary, you also need to be sure to satisfy the account holder’s required minimum distribution for the year.
- If multiple beneficiaries are named, determine their ages. The general rule is that all beneficiary distributions are based on the age of the oldest named beneficiary. However, you may be able to establish separate “inherited IRA” accounts for each beneficiary. That allows distributions to be calculated based on the age of individual beneficiaries, which could mean spreading the withdrawals over a longer time.
- Consider your tax situation. Would you prefer to have the inheritance go to another family member? You can “disclaim” or turn down your share by providing the IRA trustee with a written form stating your intention. Caution: Disclaimers are irrevocable, so be sure you’re certain of who is next in line to inherit.
The tax rules governing inherited IRAs have specific deadlines. Please give us a call so we can help you manage these key dates.
You may have had other matters on your mind in February, when the IRS issued additional guidance for business health insurance. But you’ll want to catch up with the clarifications published in Notice 2015-17. Why? Because you may need to make some changes to your health insurance reimbursement arrangement before July 1. That’s when penalty relief provided by the notice expires.
The penalty is an excise tax that applies when you reimburse employees’ health insurance premiums. The original health insurance law effectively converted these reimbursements into a group health plan. Because this type of “plan” does not meet the requirements for insurance coverage under the law, a penalty of $100 per employee, per day, can be assessed. Beginning on January 1, 2014, the penalty applied no matter how many employees you had.
Notice 2015-17 waived the penalty when you employ less than 50 full-time workers — but the waiver expires June 30.
What do you need to do if you’re still reimbursing your employees for health insurance premiums? One option is to adopt a group health insurance plan. Alternatively, instead of providing reimbursements specifically related to health insurance, you can increase your employees’ taxable wages. Just be sure the payment is not based on the cost of health insurance premiums or whether your employees actually purchase health insurance.
Are you up-to-date on your foreign asset reporting? The question may make you think of the box you checked to indicate you had a foreign account on the Schedule B you filed with your 2014 federal income tax form. Or maybe you thought of “Form 8938, Statement of Specified Foreign Financial Assets,” which is also filed with your Form 1040.
But even if you completed those two forms, you might still have to complete another report — one that is not mailed with your tax return, is due by June 30, can only be filed electronically, and has no extension.
The “Report of Foreign Bank and Financial Accounts,” or FBAR, is filed with the Department of Treasury when you have certain interests in, or authority over, foreign financial accounts. Generally, the filing requirement is triggered when the aggregate value of your foreign accounts exceeds $10,000 at any time during the year. Notice that the value of your accounts is what matters, not the amount of income you receive from the accounts. You may be required to file an FBAR even if you earn no income from your foreign financial accounts.
Reportable items include savings, checking, and time deposits, as well as brokerage and option accounts. Some life insurance policies and mutual funds are also reportable under FBAR rules.
Give Carl Heinemann, your Chattanooga CPA, a call if you have any foreign accounts. We’ll help you keep up with your reporting obligations.
Before you put your 2014 federal income tax return in the virtual or physical file drawer, check for items that can affect your 2015 planning. Here are three.
Give Carl Heinemann, your Chattanooga CPA, a call to schedule a tax planning appointment. We’re ready to help you get the most benefit from these and other carryovers, such as investment interest, tax credits, and passive activity losses.
Habits are like stepping stones. If we follow a daily routine without deviation, we tend to arrive at predictable outcomes. A person who establishes a habit of routine exercise at age thirty (other things being equal) can expect a more active and healthy lifestyle at age forty and beyond. A daily routine of inertia — the proverbial “couch potato” lifestyle — often leads to predictable results as well.
Financial habits are no different. Using credit cards to finance a lifestyle you can’t afford, routinely paying bills late, spending every paycheck to the last penny, saving little for retirement or a rainy day — such habits are hard to break. They also lead to predictable results. Some people step away from full-time employment with enough money to fund a comfortable retirement. Others struggle financially for the rest of their lives. Although income is part of the equation, poor financial habits are often the real culprit behind monetary struggles later in life.
Consider these three suggestions for establishing a healthy financial lifestyle.
- Lock up the credit cards. If you have difficulty controlling credit card spending, try living a “cash only” lifestyle for a few months. Open your safe deposit box and insert the plastic. Researchers have shown that people tend to spend more when they use credit cards instead of cash. Pulling hard currency from your wallet or purse may cause you to feel the “loss” more keenly. After a few months, you may find that new habits have been formed. At the very least, you’ll learn that it’s possible to survive without credit card debt.
- Make saving automatic. As the old saying goes, “Out of sight, out of mind.” Figure out how much you should be saving each month, then have that amount deposited directly to a savings account for emergencies or paying off debts. Saving for retirement should be automated as well. If you don’t see the money in your checking account, you’re less likely to use the money for “wants” instead of “needs.”
- Track your costs. The very act of logging your expenses — whether using a sophisticated computer application or simple paper and pencil — can be very revealing. Getting a clear understanding of where your cash is going is often the first step toward regaining control of your finances and modifying detrimental behaviors.
Addressing customer and vendor demands, keeping the shelves stocked with fresh products, ensuring that operating costs don’t eat up an inordinate share of sales revenues — these pressures and many more can crowd out the seemingly inconsequential job of documenting your company’s policies and procedures. But failure to develop and maintain written procedures is often a contributing factor behind operational inefficiencies, customer complaints, employee turnover, even fines and lawsuits.
Let’s say, for example, that your company manufactures furniture. Without written procedures, employees are free to construct each item according to their own inclinations. As a result, the assembly process is inconsistent. This leads to excessive rework and higher per-item costs. If product defects aren’t caught in time, quality begins to suffer. Customers complain and take their business elsewhere. Over time, employees become frustrated because management’s expectations aren’t apparent, which results in plummeting morale and higher staff turnover. In some industries, a lack of properly documented procedures may even cause the company to run afoul of government regulations, leading to fines or lawsuits.
But for a small company, putting your processes and procedures in writing needn’t be an onerous task.
Start with an overall flowchart, then drill down. First document “the big picture.” Set up “swim lanes” that clearly delineate each person’s or division’s responsibility. In the example of the company that makes furniture, you might want to start the process flow with a box that depicts the purchasing department ordering raw materials. Flowcharts should be clear and simple so even a new trainee can understand how your company produces goods and gets paid.
Once the overall process is documented to your satisfaction, take it to other divisions to make sure they’re in agreement. Then develop similar flowcharts for each sub-process depicted. Add detailed narratives in a separate area of the flowchart, then use those narratives to develop checklists and/or standard operating procedures. At some point, you’ll want the procedures to be so detailed that a new employee can join your team and be productive without extensive on-the-job training.
After written procedures and policies are in place, revisit them at least annually. Make sure they’re current and look for ways to make each process more efficient. If properly and consistently implemented, well-documented procedures can increase the quality of your products and services, minimize risk, and strengthen your bottom line.