Individual Retirement Accounts Kinds of IRAs and Prohibited Transactions

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Kinds of IRAs and Prohibited Transactions

You can open different kinds of IRAs with a variety of organizations. You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also open an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements, which are listed below for various arrangements.

Traditional IRAs

Your traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account.

Read 2016 Individual Retirement Accounts Kinds of IRAs and Prohibited Transactions

SIMPLE IRAs

A savings incentive match plan for employees (SIMPLE) plan is a tax-favored written agreement (salary reduction) between you and your employer that allows you to
choose to reduce your compensation (salary) by a certain percentage each pay period, and have your employer contribute the salary reductions to a SIMPLE IRA on your behalf.

All contributions under a SIMPLE IRA plan must be made to a SIMPLE IRA, not to any other type of IRA. The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described above.

If your employer maintains a SIMPLE IRA plan, you must be notified, in writing, that you can choose the financial institution that will serve as trustee for your SIMPLE IRA and that you can roll over or transfer your SIMPLE IRA to another financial institution.

Roth IRAs

A Roth IRA can be either an individual retirement account or individual retirement annuity, described above. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is opened. A SEP IRA or SIMPLE IRA cannot be designated as a Roth IRA.

Designated Roth accounts. Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. These elective deferrals are included in your income, but qualified distributions from these accounts are not included in your income. Designated
Roth accounts are not IRAs and should not be confused with Roth IRAs. Contributions, up to their respective limits, can be made to Roth IRAs and designated Roth accounts according to your eligibility to participate. A contribution to one does not impact your eligibility to contribute to the other.

Read 2016 Individual Retirement Accounts Kinds of IRAs and Prohibited Transactions

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are some examples of prohibited transactions with an IRA.
• Borrowing money from it.
• Selling property to it.
• Using it as security for a loan.
• Buying property for personal use (present or future) with IRA funds.

Read 2016 Individual Retirement Accounts Kinds of IRAs and Prohibited Transactions

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If desired, Pat Tax, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired.

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Individual Retirement Accounts-Roth IRAs

IRA Senior

Roth IRAs

Roth IRA Contribution Limits—2016
Lesser of: Taxable compensation for the year, or:
Under age 50………………………………………………………………………. $ 5,500
Age 50 or older……………………………………………………………………. $ 6,500

What is a Roth IRA?
A Roth IRA is an individual retirement arrangement. It is a personal savings plan that gives you tax advantages for setting aside money for retirement. An account must be designated as a Roth IRA when opened. Roth IRA tax advantages and rules compared to a traditional IRA:

Contributions are not deductible. Active participation in an employer plan is irrelevant.
If certain requirements are satisfied for qualified distributions, distributions are tax free.
Can withdraw contributions any time for any reason without owing taxes or penalties.
Contributions can be made after the participant reaches age 70½.
The required minimum distribution (RMD) rules do not apply. Distributions are not required until death of the participant.
Contributions are not allowed when modified adjusted gross income (MAGI) is above certain limits
Neither a SEP IRA nor a SIMPLE IRA can be set up as a Roth IRA

Click and Read 2016 Individual Retirement Accounts Roth IRAs Here

Who Can Contribute to a Roth IRA?
Generally, you can contribute to a Roth IRA if you have taxable compensation and income less than the top of the phase-out range for your filing status, see Roth IRA
Phase-outs chart, in link below..

Click and Read 2016 Individual Retirement Accounts Roth IRAs Here

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Individual Retirement Accounts-Traditional IRAs

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Traditional IRAs

IRA Contribution Limits—2016
Lesser of: Taxable compensation for the year, or:
Under age 50………………………………………………………………………. $ 5,500
Age 50 or older……………………………………………………………………. $ 6,500

What is an IRA?
An IRA is an individual retirement arrangement. It is a personal savings plan that gives you tax advantages for setting aside money for retirement. An IRA is referred to as a traditional IRA if it is not a Roth IRA or a SIMPLE IRA. Traditional IRAs include SEP IRAs.
Traditional IRA tax advantages and rules:

Contributions to an IRA may be fully or partially deductible.
Amounts in your IRA (including earnings and gains) are not taxed until distributed.
There is no limit on how much you can earn and still contribute (however, contributions are not deductible above certain amounts).
Contributions are not allowed past age 70½ and required minimum distributions begin after age 70½.
Early distributions (before you are age 59½) are subject to a 10% additional tax. Exceptions apply.
Distributions are taxed as ordinary income.

Who Can Contribute to an IRA?
Any individual can set up a traditional IRA if he or she receives taxable compensation during the year and is not age 70½ by the end of the year. An individual can have a traditional IRA even if covered by an employer-sponsored retirement plan. However, the deductible amount of contributions to a traditional IRA may be phased out. See Reduced IRA Deduction, later.

Contribution limit. Contributions to IRAs are limited to the lesser of the individual’s compensation (or spouse’s compensation under a spousal IRA), or $5,500 ($6,500 for age 50 or older).

Click and Read 2016 Individual Retirement Accounts Traditional IRAs Here

Total contributions are combined with Roth IRA contributions to determine limits. For example, a $1,000 contribution to a Roth IRA will reduce total contributions allowable to a traditional IRA by $1,000.

Spousal IRA. If both spouses have compensation, each can set up a separate IRA. Spouses cannot participate in the same IRA. If filing status is Married Filing Jointly and one spouse’s compensation is less than the contribution limit, the lower-income spouse can use the compensation of the other spouse to qualify. However, the spousal IRA is limited to total compensation reduced by any IRA contributions.

This means that the total combined contributions that can be made for the year to your IRA and your spouse’s IRA can be as much as $11,000 ($12,000 if only one of you is age
50 or older or $13,000 if both of you are age 50 or older).70½ rule. Contributions cannot be made in a year the participant has reached age 70½ or for any later year.

Click and Read 2016 Individual Retirement Accounts Traditional IRAs Here

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Health Care Reform-State Health Insurance Exchanges

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State Health Insurance Exchanges

The Health Insurance Marketplace helps uninsured people find health coverage. When you fill out the Marketplace application online the website will tell you if you qualify for:

Private health insurance plans. The site will tell you whether you qualify for lower costs based on your household size and income. Plans cover essential health benefits, pre-existing conditions, and preventive care. If you don’t qualify for lower costs, you can still use the Marketplace to buy insurance at the standard price.
Medicaid and the Children’s Health Insurance Program (CHIP). These programs provide coverage to millions of families with limited income. If it looks like you qualify, the exchange will share information with your state agency and they’ll contact you. Many but not all states have expanded Medicaid in 2014 to cover more people.

Click and Read 2016 Health Care Reform State Health Insurance Exchanges Here

No Matter What State You Live in, You Can Use the Marketplace
Some states operate their own Marketplace. In some states, the Marketplace is run by the federal government.

Most people must have health coverage in 2015 or pay a fee. If you don’t have coverage in 2015, you’ll have to pay a penalty of $325 per adult, $162.50 per child, or 2% of your income (whichever is higher). The fee increases every year. Some people may qualify for an exemption to this fee. If you enrolled by March 31, 2015, you won’t have to pay the fee for any month before your coverage began.

You’re considered covered if you have Medicare, Medicaid, CHIP, any job-based plan, any plan you bought yourself, COBRA, retiree coverage, TRICARE, VA health coverage, or some other kinds of health coverage.

If you’re eligible for job-based insurance, you can consider switching to a Marketplace plan. But you won’t qualify for lower costs based on your income unless the job-based insurance is unaffordable or doesn’t meet minimum requirements. You also may lose any contribution your employer makes to your premiums.

If you have Medicare, you’re considered covered and don’t have to make any changes. You can’t use the Marketplace o buy a supplemental or dental plan.

Click and Read 2016 Health Care Reform State Health Insurance Exchanges Here

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Health Care Reform-Individual Insurance Requirement

ACA June 6

Requirement to Have Health Insurance

Beginning January 2014, nonexempt U.S. citizens and legal residents are required to maintain minimum essential coverage. Minimum essential coverage can include
government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans, and other coverage as recognized by the Secretary of Health and Human Services (HHS), in coordination with the Secretary of the Treasury.

Government-sponsored programs include Medicare, Medicaid, Children’s Health Insurance Program, coverage for members of the U.S. military, veteran’s health care, and health care for Peace Corps volunteers. Eligible employer-sponsored plans include governmental plans, church plans, grandfathered plans, COBRA coverage, retiree coverage, and other group health plans offered in the small or large group market within a state.

Click and Read 2016 Health Care Reform Individual Insurance Requirement Here

Health Insurance Portability and Accountability Act (HIPAA)

Excepted Benefits
Minimum essential coverage does not include coverage that consists of certain HIPAA excepted benefits. HIPAA excepted benefits include:
1) Coverage only for accident or disability income insurance,
2) Coverage issued as a supplement to liability insurance,
3) Liability insurance, including general liability insurance and automobile liability insurance,
4) Workers’ compensation or similar insurance,
5) Automobile medical payment insurance,
6) Credit-only insurance,
7) Coverage for on-site medical clinics, and
8) Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits. Other HIPAA excepted benefits that do not constitute minimum essential coverage if offered under a
separate policy, certificate, or contract of insurance include long-term care, limited scope dental and vision benefits, coverage for a disease or specified illness, hospital indemnity or other fixed indemnity insurance, or Medicare supplemental health insurance.

Click and Read 2016 Health Care Reform Individual Insurance Requirement Here

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Health Care Reform-Premium Assistance Credit

2016 Health Care Reform

Premium Assistance Credit

Health Care Reform created a refundable premium assistance credit for eligible individuals and families to subsidize the purchase of health insurance through an exchange.

Eligible individuals enrolled in the plan report their income to the exchange. Based on the income reported, the individual receives a premium assistance credit. The credit is paid directly to the insurance plan. The individual then pays the insurance plan the difference between the credit amount and the total premium charged.

2016 Health Care Reform Premium Assistance Credit

Eligibility
Initial eligibility for the premium assistance credit is based on the individual’s income for the tax year ending two years prior to the enrollment period. Individuals (or couples) who experience a change in marital status or other household circumstance, experience a decrease in income of more than 20%, or receive unemployment insurance, may update eligibility information or request a redetermination of their credit eligibility.

The premium assistance credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the federal poverty level (FPL) for the family size involved who do not receive health insurance through an employer or a spouse’s employer.

Note: Individuals below 133% of FPL are generally eligible 2016 Health Care Reform Premium Assistance Credit for Medicaid coverage under the new law.

2016 Health Care Reform Premium Assistance Credit

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Health Care Reform Cost Sharing Subsidy for Individuals with High-Deductible Plans

2016 ACA

Cost Sharing Subsidy for Individuals with High-Deductible Plans

Out-Of-Pocket Expense Limits
The health care reform law provides for a cost-sharing subsidy to reduce the maximum annual deductible and out-of-pocket expense limits for high-deductible health
plans for individuals and households between 100% and 400% of the federal poverty level (FPL). A high deductible health plan is currently $6,450 for self-only coverage in 2015 and $12,900 for family coverage in 2015. High-deductible health plans are those plans that
qualify the taxpayer to contribute to a health savings account (HSA) (or allow an employer to contribute to the HSA of an employee).

2016 Health Care Reform Cost Sharing Subsidy for Individuals with High-Deductible Plans

Note: The individual does not have to contribute to an HSA to qualify for the subsidy. The individual merely has to have a high-deductible health plan and fall within the FPL income range.

Note: Individuals below 133% of FPL are generally eligible for Medicaid coverage under the health care reform law.

2016 Health Care Reform Cost Sharing Subsidy for Individuals with High-Deductible Plans

Calculation of Subsidy
For individuals with household income of more than 100%, but not more than 200% of FPL, the out-of-pocket limit is reduced by two-thirds. For those between 201%
and 300% of FPL, the out-of-pocket limit is reduced by one-half, and for those between 301% and 400% of FPL, the out-of-pocket limit is reduced by one-third.

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Divorce and Taxes

Divorce and Taxes

Filing status. Filing status is based on your status as of December 31. If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year and you cannot choose Married Filing Jointly as your filing status. If you are still married at the end of the year (your divorce is not yet finalized), then you must file as Married Filing Jointly or Married Filing Separately, or Head of Household, if qualified.
You cannot file as Single if you are married.

Joint responsibility. You may be held jointly and individually responsible for any tax, interest, and penalties due on a joint return filed before your divorce. This responsibility may apply even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns. Name change. If you changed your names because of divorce, be sure to report the change to your local Social Security Administration office before filing your tax return. The name you enter on your tax return must be the same as what is on your Social Security card.

Click and Read Divorce and Taxes Here

Exemptions. If you obtained a final decree of divorce or separate maintenance during the year, you cannot take your former spouse’s exemption. This rule applies even if you provided all of your former spouse’s support.

Dependents. In most cases, a child of divorced or separated parents is the qualifying child of the custodial parent (the parent with whom the child resides for the greater number of nights during the year). If the parents divorced or separated during the year and a child lived with both parents before the separation, the custodial parent is the one with whom the child lived for the greater number of nights during the rest of the year.

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IRS Audits

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Representation

Individual taxpayers who are under audit by the IRS may attend the audit in person without any assistance from a tax professional. However, this can be a dangerous
mistake. Although not officially stated, it is the job of an IRS Revenue Agent to conduct an audit with an eye toward finding additional tax owed.

With so many gray areas in tax law, and considering the tax code’s complexity, an individual who chooses to go it alone is a sitting duck. Without extensive tax education and experience, the examiner can (and sometimes will) say anything to find additional tax due on the return. Without the necessary knowledge, the taxpayer is powerless to refute the agent’s rationale.

Click and Read Audits Here

Selection of Returns for Examination

Search for Unreported Income
The IRS performs matching functions to reconcile information reported on Forms 1099 and W-2 with information reported on the taxpayer’s return. If income reported by the taxpayer does not meet or exceed amounts reported to the IRS, the taxpayer will receive either a bill for tax on the difference or an audit notice.

Worker Reclassification Efforts
The IRS conducts joint employment audits with state tax agencies to determine whether workers classified as independent contractors are in fact employees. One initiative
looks at employers who issue both Forms 1099 and W-2 to the same employee in the same year, while a second examines employers issuing more than five 1099-MISC forms exceeding $25,000 each to contractors with no other source of income.

Click and Read Audits Here

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Education Tax Benefits

Educational Benefits

Education Tax Benefits

If you pay tuition, fees, and other costs for attendance at an eligible educational institution for yourself, your spouse, or your dependent, you may be able to take advantage of one or more of the education tax benefits.

You can claim more than one education benefit in a tax year as long as you do not use the same expenses for more than one benefit.

Exception: Qualified expenses used to claim education benefits can also be used to eliminate the 10% penalty on premature IRA distributions.

You may claim only one of the following education tax benefits for the same student per year: tuition and fees deduction, American Opportunity Credit, or Lifetime Learning Credit.

Click and Read Education Tax Benefits Here

Education Deductions.
Deductions reduce the amount of income subject to income tax. Deductions for education expenses include:

Tuition and fees deduction up to $4,000 from gross income. Income limitations apply.
The provision for deducting tuition and fees expires for tax years after 2016.
Student loan interest deduction up to $2,500 from gross income. Income limitations apply.
Business deduction on Schedule C or F. You can deduct the cost of education related to the business or farm activity.
Miscellaneous itemized deduction on Schedule A, subject to the 2% AGI limitation. You can deduct the unreimbursed cost of education required to keep your current job or maintain and improve skills needed for your job. You cannot deduct the cost of education that qualifies you for a new trade or business.

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Education Tax Credits
Tax credits reduce the amount of income tax you may have to pay. Income limitations apply. The education credits are claimed on Form 8863, Education Credits
(American Opportunity and Lifetime Learning Credits).

American Opportunity Credit, $2,500 maximum per student per year.
Lifetime Learning Credit, $2,000 maximum per tax return per year.

Note: The Hope Credit applied to 2008 and earlier years. It was replaced by the more generous American Opportunity Credit for the 2009 – 2017 tax years.

Penalty-Free IRA Distributions
If you withdraw money from your IRA before you are age 59½, you are generally subject to a penalty of 10% of the distribution, in addition to any tax that may be due on the distribution.

The 10% penalty does not apply to traditional IRA or Roth IRA withdrawals, if you use the money to pay qualified education expenses for yourself, spouse, or for any child or grandchild of yourself or your spouse.
Qualified education expenses include tuition, fees, books, supplies, equipment, and special needs services required for enrollment or attendance at an eligible
educational institution. Room and board for students enrolled at least half-time in a degree or certificate program may also qualify.
Reduce qualified expenses by scholarships and other tax-free assistance the student receives, but not by gifts or inheritances.

Click and Read Education Tax Benefits Here

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Roth IRAs

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Traditional IRAs

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State Health Insurance Exchanges

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Click and Read Divorce and Taxes Here

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Click and Read Audits Here

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