Wednesday, December 24, 2014

New IRS Publication helps you understand the Health Care Law



There is a new publication that will help you learn about how the Affordable Care Act affects your taxes.  IRS Publication 5187, Health Care Law: What’s New for Individuals and Families is now available on IRS.gov/aca. While the health care law has several parts, this publication breaks down what’s new for the 2014 federal tax return you will be filing in 2015.

This new publication provides important information for taxpayers who:
  • Had health insurance coverage for the entire year
  • Did not have health coverage for each month of the year
  • Purchased health insurance from the Marketplace
  • Might be eligible for an exemption from  the coverage requirement
  • Had advance payments of the premium tax credit sent to their insurance provider
  • Is claiming the premium tax credit on their tax return
The publication includes a glossary that will help you understand new terms related to ACA. It also addresses the new lines for reporting ACA information on Forms 1040, 1040-A and 1040-EZ.

Most people have qualifying health coverage, and all they will need to do is simply check a box on their tax return.

You can access Publication 5187 at IRS.gov/aca, along with other important information related to the health care law. You can also find it by typing “p5187” into the search window at the top of any IRS.gov page or “5187” in the Forms and Pubs search window on IRS.gov.

Tuesday, December 23, 2014

Tax-Free Transfers to Charity Renewed For IRA Owners 70½ or Older; Rollovers This Month Can Still Count For 2014


IR-2014-117, Dec. 23, 2014
WASHINGTON — Certain owners of individual retirement arrangements (IRAs) have a limited time to make tax-free transfers to eligible charities and have them count for tax-year 2014, the Internal Revenue Service said today.

IRA owners age 70½ or older have until Wednesday, Dec. 31 to make a direct transfer of part or all of their IRA distributions to an eligible charity.

The Tax Increase Prevention Act, enacted Dec. 19, extended for 2014 the provision authorizing these qualified charitable distributions (QCDs). The provision had expired at the end of 2013. With this retroactive renewal, any eligible IRA distribution during 2014 properly transferred to a qualified charity counts as a QCD.

As a result, older IRA owners once again have a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer, tax-free, up to $100,000 per year to an eligible charity. This option, first available in 2006, can be used for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRA plans and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income – resulting in lower taxable income for the IRA owner. However, if the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution (RMD).

Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.

QCDs are reported on Form 1040 Line 15. The full amount of the QCD is shown on Line 15a. Do not enter any of these amounts on Line 15b but write “QCD” next to that line.

Rollovers of After-Tax Contributions in Retirement Plans



The law provides that if a participant’s account balance in a plan includes both pretax and after-tax amounts, then distributions from the account generally are considered to include a pro rata share of both pretax and after-tax amounts.  For example, if your account balance is $100,000, and consists of $80,000 in pretax amounts and $20,000 in after-tax amounts, and you request a distribution of $50,000, your distribution would consist of $40,000 of pretax amounts and $10,000 of after-tax amounts.  

Prior to the issuance of Notice 2014-54, the IRS treated disbursements from a retirement plan that were rolled over to multiple destinations as separate distributions to each destination, with each distribution treated as containing a pro rata portion of the pretax and after-tax amounts..  Notice 2014-54, which was issued September 18, 2014, provides that all disbursements from a retirement plan scheduled to be made at the same time are treated as a single distribution even if they are sent to multiple destinations. 

As a result of this notice, taxpayers with pretax and after-tax amounts in their plan, for example, can transfer through direct rollovers the pretax portion of the distribution (including earnings on after-tax amounts) to a traditional IRA and the after-tax portion of the distribution to a Roth IRA.  (Previous interpretations allowed accomplishing this result through 60-day rollovers but not direct rollovers.)  The guidance provided in Notice 2014-54 applies only to distributions from qualified plans described in section 401(a) of the Code (such as profit-sharing and 401(k) plans), section 403(b) plans and section 457(b) governmental plans.  The guidance in Notice 2014-54 is generally effective January 1, 2015; however, transitional rules included in the guidance permit taxpayers to utilize the new rules provided in the guidance prior to the effective date. 

The guidance in Notice 2014-54 does not apply to distributions from IRAs.  

The Service has received a number of questions following the issuance of Notice 2014-54.  The following FAQs are provided to assist taxpayers in applying the notice.

Can I roll over just the after-tax amounts in my account to a Roth IRA and leave the remaining amounts in the plan (i.e., take a partial distribution of just the after-tax amounts)?

No.  The guidance provided in Notice 2014-54 does not alter the requirement that each distribution from a plan must include a proportional share of the pretax and after-tax amounts in the account.  Accordingly, any partial distribution from the plan must include some of the pretax amounts you have in your account -- you cannot take a distribution of only the after-tax amounts and leave the pretax amounts in the plan.  In order to roll over all of your after-tax contributions to a Roth IRA, you could take a distribution of the full amount (all pretax and after-tax amounts) in your account, roll over all the pretax amounts in a direct rollover to a traditional IRA or another eligible retirement plan, and roll over all the after-tax amounts in a direct rollover to a Roth IRA.  

I want to roll over my after-tax contributions to a Roth IRA and roll over earnings on my after-tax contributions to a traditional IRA. Can I do that?

Yes.  Earnings associated with after-tax contributions are pretax amounts in your account.  Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings.  Under the guidance, all pretax amounts in a distribution may be rolled over to a traditional IRA and, in that case, will not be included in income until distributed from the IRA.

Additional resources:

New Law Renews IRA Transfers to Charity for 2014; Owners Must Act by Dec. 31



The Tax Increase Prevention Act extends the provision that allows certain IRA owners to make tax free distributions to charity. The extension applies for the 2014 tax year. This means if the law applies to you, the deadline to complete your transactions is Dec. 31. Here are some key points about the extension:
  • If you are an IRA owner age 70½ or older you have until Dec. 31 to make a qualified charitable distribution, or QCD.
  • A QCD is direct transfer of part or all of your IRA distributions to an eligible charity. You may transfer up to $100,000 per year.
  • You may exclude the distributed amounts from your income. You can claim this benefit regardless of whether you itemize your deductions. If you do exclude the QCD from your income, you can’t also deduct it as a charitable contribution on Schedule A if you do itemize.
  • You can count your QCDs in determining whether you meet the IRA’s required minimum distribution.
  • The provision had expired at the end of 2013. The new law is retroactive for 2014. This means any eligible QCD in 2014 will qualify.
  • Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients..

If you found this Tax Tip helpful, please share it through your social media platforms.. A great way to get tax information is to use IRS Social Media. You can also subscribe to IRS Tax Tips or any of our e-news subscriptions.

Additional IRS Resources:
IR-2014-117, Tax-Free Transfers to Charity Renewed For IRA Owners 70½ or Older; Rollovers This Month Can Still Count For 2014

Monday, December 22, 2014

Taxpayer Bill of Rights



Every taxpayer has a set of fundamental rights. You should be aware of these rights when you interact with the Internal Revenue Service.

The “Taxpayer Bill of Rights” takes the many existing rights in the tax code and groups them into 10 broad categories. That makes them easier to find and to understand.

You can find a list of your rights and the IRS’s obligations to protect them in Publication 1, Your Rights as a Taxpayer. It includes the following:

1. The Right to Be Informed..
Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.

2. The Right to Quality Service.
Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS and to speak to a supervisor about inadequate service.

3. The Right to Pay No More than the Correct Amount of Tax.
Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.

4. The Right to Challenge the IRS’s Position and Be Heard.
Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.

5. The Right to Appeal an IRS Decision in an Independent Forum.
Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.

6. The Right to Finality.
Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.

7. The Right to Privacy.
Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections, and will provide, where applicable, a collection due process hearing.

8. The Right to Confidentiality.
Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.

9. The Right to Retain Representation.
Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.

10. The Right to a Fair and Just Tax System.
Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

The IRS is trying to increase the number of Americans who know and understand their rights under the tax law. To expand awareness, the IRS is making Publication 1 available in multiple languages on IRS.gov. This important publication is available in English, Chinese, Korean, Russian, Spanish and Vietnamese.

The IRS will include Publication 1 when sending notices to taxpayers on a range of issues, such as an audit or collection matter. All IRS facilities will publicly display the rights for taxpayers and employees to see.

The IRS released the Taxpayer Bill of Rights following extensive discussions with the Taxpayer Advocate Service. TAS is an independent office inside the IRS that represents the interests of U.S. taxpayers.

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Additional IRS Resources: