Year: 2017

Taxpayers born before July 1, 1947, generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by December 31.

Known as required minimum distributions (RMDs), typically these distributions must be made by the end of the tax year, in this case, 2017. The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2017 RMD, this amount is on the 2016 Form 5498 normally issued to the owner during January 2017.

A special rule allows first-year recipients of these payments, those who reached age 70 1/2 during 2017, to wait until as late as April 1, 2018, to receive their first RMDs. What this means that those born after June 30, 1946, and before July 1, 1947, are eligible. The advantage of this special rule is that although payments made to these taxpayers in early 2018 can be counted toward their 2017 RMD, they are taxable in 2018.

The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by December 31. So, for example, a taxpayer who turned 70 1/2 in 2016 (born after June 30, 1945, and before July 1, 1946) and received the first RMD (for 2016) on April 1, 2017, must still receive a second RMD (for 2017) by December 31, 2017.

The RMD for 2017 is based on the taxpayer’s life expectancy on December 31, 2017, and their account balance on December 31, 2016. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For a taxpayer who turned 72 in 2017, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer’s only beneficiary. If you need assistance with this, don’t hesitate to call.

Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions; however, there may be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

For more information on RMDs, please call.

• By Leon Clinton
• December 21, 2017

With another school year in full swing, now is a good time for parents and students to see if they qualify for either of two college tax credits or other education-related tax benefits when they file their 2017 federal income tax returns next year.

American Opportunity Tax Credit or Lifetime Learning Credit. In general, the American Opportunity Tax Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse, and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return.

Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. To claim these credits on their tax return, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.

The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the amount taxpayers can claim on their tax return.

Normally, a student will receive a Form 1098-T from their institution by January 31, 20187. This form shows information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits.

Many of those eligible for the American Opportunity Tax Credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified education expenses paid during the entire tax year for a certain number of years:

• The credit is only available for four tax years per eligible student.
• The credit is available only if the student has not completed the first four years of post-secondary education before 2017.

Here are some more key features of the credit:

• Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
• The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who owe no tax can get a payment of up to $1,000 for each eligible student.
• The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more, and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.

Lifetime Learning Credit. The Lifetime Learning Credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return, rather than to each student. Also, the Lifetime Learning Credit does not provide a benefit to people who owe no tax.

Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

• Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
• The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
• Income limits are lower than under the American Opportunity Tax Credit. To claim the full credit for 2017 your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly). You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers). For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.

Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4 with their employer to claim additional withholding allowances.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

• Scholarship and fellowship grants–generally tax-free if used to pay for tuition, required enrollment fees, books, and other course materials, but taxable if used for room, board, research, travel or other expenses.
• Tuition and fees deduction claimed on Form 8917–for some, a worthwhile alternative to the American Opportunity Tax Credit or Lifetime Learning Credit.
• Student loan interest deduction of up to $2,500 per year.
• Savings bonds used to pay for college–though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
• Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.

If you have any questions about college tax credits, please contact the office.

• By Leon Clinton
• December 19, 2017

Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for the tax year 2018 have been announced by the IRS. Here are the highlights:

In general, income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the saver’s credit all increased for 2018. In addition, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500. However, contribution limits for SIMPLE retirement accounts for self-employed persons remains unchanged at $12,500.

Traditional IRAs

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-out amounts of the deduction do not apply. Here are the phase-out ranges for 2018:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
• For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $189,000 and $199,000, up from $186,000 and $196,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRAs

The income phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Saver’s Credit

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.

Limitations that remain unchanged from 2017

• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
• The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

• By Leon Clinton
• December 16, 2017