IRS Clarifies One-Per-Year Limit on IRA Rollovers in 2015

Retirement plan documents and pen

The Internal Revenue Service recently issued guidance clarifying the impact a 2014 individual retirement arrangement (IRA) rollover has on the one-per-year limit imposed by the Internal Revenue Code on tax-free rollovers between IRAs.

The clarification relates to a change in the way the statutory one-per-year limit applies to rollovers between IRAs. The change in the application of the one-per-year limit reflects an interpretation by the U.S. Tax Court in a January 2014 decision applying the limit to preclude an individual from making more than one tax-free rollover in any one-year period, even if the rollovers involve different IRAs.

Before 2015, the one-per-year limit applies only on an IRA-by-IRA basis (that is, only to rollovers involving the same IRAs). Beginning in 2015, the limit will apply by aggregating all an individual’s IRAs, effectively treating them as if they were one IRA for purposes of applying the limit.

To allow transition time, the IRS made it clear that the new interpretation will apply beginning Jan. 1, 2015. A distribution from an IRA received during 2014 and properly rolled over within 60 days to another IRA, will have no impact on any distributions and rollovers during 2015 involving any other IRAs owned by the same individual. In other words, IRA owners will be able to make a fresh start in 2015 when applying the one-per-year rollover limit to multiple IRAs.

Although an eligible IRA distribution received on or after Jan. 1, 2015 and properly rolled over to another IRA will still get tax-free treatment, subsequent distributions from any of the individual’s IRAs (including traditional and Roth IRAs) received within one year after that distribution will not get tax-free rollover treatment. As the guidance makes clear, a rollover between an individual’s Roth IRAs will preclude a separate tax-free rollover within the 1-year period between the individual’s traditional IRAs, and vice versa.

Keep in mind Roth conversions which are rollovers from traditional IRAs to Roth IRAs, rollovers between qualified plans and IRAs, and trustee-to-trustee transfers which are direct transfers of assets from one IRA trustee to another are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.

Therefore IRA owners should request trustee to trustee direct transfers or request a check made payable to the receiving IRA trustee and deliver it to the receiving trustee themselves within 60 days of the check date.

If you have any questions, please contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604.

Qualifying for the Family-Owned Business Exemption from Pennsylvania Inheritance Tax

Beginning July 1, 2013, the transfer at death of certain family owned business interests are exempt from the Pennsylvania inheritance tax. Pennsylvania Inheritance Tax is currently 4.5% for linear descendants, 12% for siblings and 15% for everyone else. To qualify for the family-owned business exemption, a family-owned business interest must:

  1. Have been in existence for five years prior to the decedent’s death;
  2. Have less than 50 full time equivalent employees and a net book value of assets totaling less than $5,000,000 at the date of the decedent’s death;
  3. Be engaged in a trade or business, the principal purpose of which is not the management of investments or income producing assets;
  4. Be transferred to one or more qualified transferees – the decedent’s husband or wife, grandfather, grandmother, father, mother, or children, siblings or their children. Children include natural children, adopted children; and stepchildren;
  5. Owned by a qualified transferee for a minimum of seven years after the decedent’s death;
  6. Reported on a timely filed Pennsylvania inheritance tax return and filed within 9 months of the decedents date of death, or within 15 months of the decedent’s date of death if the estate or person required to file the return was granted the six month statutory extension.

The transferee must file an annual certification and notify the Pennsylvania Department of Revenue within thirty days of any transaction or occurrence causing the qualified family-owned business to fail to qualify for the exemption. Failure to comply with the certification or notification requirements results in a total loss of the exemption.

If you feel you qualify for the family-owned business exemption please contact Gregory J. Spadea online or at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

9 Exceptions to the 10% Premature Distribution Penalty on Individual Retirement Accounts

2 elderly people on the couch

Whenever you take a premature distribution from your Individual Retirement Account (IRA) you have to pay a 10% penalty on the taxable amount of the distribution in addition to federal income tax. However there are 9 exceptions that you can use to avoid paying that 10% penalty which are as follows:

  1. Withdrawals That Count as Substantially Equal Periodic Payments (SEPPs). This exception is the same as the one for qualified retirement plan withdrawals, except separation from service is not required. The rules for SEPPs require you to receive a series of annual payouts. This is similar to an annuity which pays you an equal stream of payments for a set period. If you have several IRAs, you do not need to withdraw from them all. You only need to annuitize one or more of the IRAs to generate annual SEPPs that are big enough to meet your cash needs. However, the entire balance in all your IRAs must be considered and annuitizing only a portion of an IRA does not qualify for this exception. Unfortunately, the SEPP exception has two important requirements that you need to be aware of:
    • (1) Once begun, the SEPP must continue for at least five years or, if later, until the owner reaches age 59 1/2. If the SEPPs are stopped too soon, all the previous age 59 1/2 withdrawals that were thought to have been taken under the SEPP exception are subject to the 10% penalty tax. The same thing can happen if the annuitized account is modified during the period when SEPPs are required, for example by making annual contributions to that account or by rolling over all or part of that account into another account.
    • (2) Annual SEPP amounts must be calculated correctly. If the correct annual amounts are not withdrawn, it is deemed to be a prohibited modification of the SEPP, which results in all the previous age 59 1/2 withdrawals that were thought to have been taken under the SEPP exception being hit with the 10% penalty tax.
  2. Withdrawals for Medical Expenses in Excess of 10% (or 7.5% if you or your spouse are over 65) of Adjusted Gross Income (AGI). This exception is the same as the one for qualified plan withdrawals.
  3. Withdrawals by Military Reservists Called to Active Duty. This exception is the same as the one for qualified plan withdrawals.
  4. Withdrawals for IRS Levies. This exception is the same as the one for qualified plan withdrawals. Note that this exception is unavailable when the IRS levies against the IRA owner (as opposed to the IRA itself), and the owner then withdraws IRA funds to pay the levy.
  5. Withdrawals after Death. This exception is the same as the one for qualified plan withdrawals. Note that this exception is not available for funds rolled over into a surviving spouse’s IRA or if the surviving spouse elects to treat the inherited IRA as her own account. Therefore, the surviving spouse should leave amounts that will be needed before age 59 1/2 in the inherited IRA. This way, the 10% penalty tax can be avoided on those amounts.
  6. Withdrawals after Disability. This exception is the same as the one for qualified plan withdrawals.
  7. Withdrawals for First-time Home Purchases. This exception applies only to IRAs. It allows penalty-free withdrawals (up to $10,000 per lifetime) to the extent the account owner uses the funds within 120 days to pay for qualified acquisition costs for a first-time principal residence. The principal residence can be acquired by: (1) the account owner or the account owner’s spouse; (2) the account owner’s child, grandchild, or grandparent; or (3) the spouse’s child, grandchild, or grandparent. The buyer of the principal residence (and the spouse if the buyer is married) must not have owned a present interest in a principal residence within the two-year period that ends on the acquisition date. Qualified acquisition costs are defined as costs to acquire, construct, or reconstruct a principal residence-including closing costs.
  8. Withdrawals for Qualified Higher Education Expenses. This exception only applies to IRAs. Early IRA withdrawals are penalty-free to the extent of qualified higher education expenses paid during that same year. Qualified higher education expenses include amounts paid for tuition, books, fees and other related expenses for an eligible student. This amount will be reflected on a form 1098-T that the school will send to the student. However, the qualified expenses must be for the education of: (1) the account owner or the account owner’s spouse or (2) a child, stepchild, or adopted child of the account owner or the account owner’s spouse.
  9. Withdrawals for Health Insurance Premiums during Unemployment. This exception only applies to IRAs, and is available if you received unemployment compensation payments for 12 consecutive weeks under any federal or state unemployment compensation law during the year in question or the preceding year. If this condition is satisfied, your early withdrawals during the year in question are penalty-free up to the amount paid during that year for health insurance premiums to cover the account owner, spouse, and dependents. However, early withdrawals after you regain employment for at least 60 days don’t qualify for this exception.

If you took a distribution from your IRA and received a form 1099-R with a distribution code of 1, and feel you meet one of exceptions listed above, please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC located in Ridley Park, Pennsylvania.

Preparing for the IRS Trust Fund Recovery Penalty Interview

Stop, pay your taxes!

If you fail to pay over the federal employment tax you withhold from your employees’ salaries the IRS will eventually come knocking on your door. This problem generally occurs when a business runs short of cash to pay both operating expenses and payroll. There may be enough cash to pay vendors and pay net payroll, but not enough to pay the federal government the employer and employee withholding taxes. Employer withholding taxes are 7.65% of gross payroll which consists of 6.2% social security tax and 1.45% medicare tax. The employee withholding consists of federal income tax and state income withheld in addition to the 6.2% social security tax and 1.45% medicare tax.

When the quarterly 941 federal employment tax return is filed with the IRS, the Government gives the employee credit for the tax withheld listed on the quarterly 941 returns whether the employer pays over the employer and employee withholdings or not. That is why the tax withholdings are called trust fund taxes because the employer is holding the money in trust for the federal government. The funds do not belong to the employer and if the employer uses the money for something else he is in essence stealing from the federal government.

If you fail to pay over the employer tax withholding every month or quarter a Revenue Officer will show up at your business unexpectedly and want to interview you. You should hire a tax attorney before speaking with the Revenue Officer. I have handled many trust fund recovery interviews and have been able to reduce the proposed assessments dramatically if I was involved before the IRS Form 4180 interview took place. IRS Form 4180 is the form the Revenue Officer completes during the interview. The Revenue Officer will try to determine if you are the responsible party by asking:

  1. Did you make deposits or sign the business checks;
  2. Did you determine what bills were paid;
  3. Did you have ability to hire and fire employees;
  4. Did you sign the federal employment and income tax returns;
  5. Did you sign loans on behalf of the business;
  6. Were you involved in the day to day operations of the business;
  7. Did you make or authorize payment of federal tax deposits.

If the Revenue Officer determines that you are the responsible party he will issue Form 2751 which is a Proposed Assessment of the Trust Fund Penalty. I will help you determine If you do not agree with the proposed liability you can submit an appeal request within 60 days of the issuance of the notice. If the case is not resolved in IRS Appeals you can file a complaint in federal district court.

If a Revenue Officer does call or visit your business, please call Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, in Ridley Park, Pennsylvania.

What Happens to Your Debts When You Die?

When you die, your executor has responsibility to pay all your remaining debts if your estate has enough probate assets to pay them. Probate assets are assets that were in your name alone and pass by your will. Before your executor pays any creditors he or she must first pay the estate administration expenses such as funeral costs, grave marker, probate fees, medical bills, attorney fees and rent for the previous six months prior to your death. After the administrative expenses are paid, the secured creditors are paid and any probate assets remaining will go to pay unsecured creditors.

If the estate is not solvent, and a creditor is paid more than he is entitled to receive, the executor can be held personally responsible to the extent of the overpayment. The executor also may be personally liable if he or she distributes estate property without having given proper notice to those having a claim against the estate.

As a general rule, debt collectors may not try to collect from your heirs. However, there are several exceptions. The first exception is if an heir was a co-signer of a particular debt in which case they would be responsible for that debt or if someone held property jointly with you, they would be responsible for any debts on the joint property. The third exception is if an heir inherits a car or a boat that had an outstanding loan, they would have to pay the loan off or the car or boat would be repossessed by the lender.

Creditors cannot be paid from any assets that pass directly to a beneficiary. Assets that pass directly to a beneficiary are called non-probate assets and include jointly owned bank accounts and any account or life insurance policy with a named beneficiary. Therefore a jointly held bank account would pass directly to the joint owner, and the funds in that account could not be used to pay creditors. Similarly, life insurance policies pass directly to the beneficiaries, so creditors do not have access to those funds. In addition creditors cannot access funds held in an irrevocable trust.

A debt collector may not contact your heirs or relatives to try to collect payment unless they were co-signers of the debt or the debt was a jointly owned debt. Debt collectors are allowed to contact the executor of your estate, or your spouse, or your parents if you were a minor, to discuss the debts but may not discuss the debts with anyone else.

Contact Gregory J. Spadea

If you have any questions or need help probating an estate please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

Is My Property Exempt From Pennsylvania Real Estate Tax?

A house

If you own a property that is regularly used by a charity or falls into one of the 8 categories below you may be exempt from paying real estate tax. To qualify for an exemption your property must be:

  1. Zoned in your Current Municipality for a Real Estate Tax Exemption
  2. An actual place of regular religious worship;
  3. A non-profit burial place;
  4. Property used regularly for public purposes;
  5. Owned Occupied and used by any branch or post of honorably discharged service persons and regularly used for charitable or patriotic purposes;
  6. Actually and regularly used by an institution of purely public or private charity for the purpose of the institution;
  7. A Hospital or institution of learning (schools) or charity including fire and rescue station founded and maintained by public or private charity; or
  8. A Public Library, museum, art gallery or concert music hall provided and maintained by public or private charity.

If your organization falls into any one of the seven categories listed above you can apply for an exemption from real estate tax in the county you are located. If you have any questions call Spadea & Associates, LLC at 610-521-0604.

Wrongful Death Proceeds Are Not Subject to Pennsylvania Inheritance Tax or Federal Income Tax

The Pennsylvania Wrongful Death statute allows the personal representative of an estate to bring an action for the benefit of a decedent’s spouse, children or parents to recover damages for the death of the decedent caused by the wrongful act, neglect, unlawful violence of another. The statute entitles a plaintiff to recover damages for pain and suffering, loss of earning power, medical and hospital bills, funeral expenses and certain estate administration expenses.

Wrongful death proceeds are not taxable for Pennsylvania Inheritance purposes or for federal income tax purposes. On the other hand survival action proceeds are subject to Pennsylvania inheritance tax. Since Pennsylvania taxes survival actions but not wrongful death actions, you, through your attorney want to maximize the wrongful death recovery amount. The court tends to allocate the proceeds of wrongful death actions and survival actions based upon the facts of the case and the evidence presented by your attorney.

Under the Pennsylvania Probate, Estate and Fiduciary code the Pennsylvania Department of Revenue is an interested party in any orphan’s court proceeding. Therefore your attorney must get written consent from the Pennsylvania Department of Revenue regarding the proposed allocation since its interests will be adversely affected by the amount allocated to the wrongful death action.

Survival Actions are valued at the decedent’s date of death for Pennsylvania Inheritance tax purposes. Any unpaid Inheritance tax is due within thirty days after the estate receives the proceeds. If there is any tax due beyond thirty days the Pennsylvania Department of Revenue begins charging interest on the unpaid balance which is currently 6%.

Contact Gregory J. Spadea

If you have a question about a wrongful death action or survival action please contact Spadea & Associates, LLC online or at 610-521-0604, located in Ridley Park, Pennsylvania.

What Should I Do if I Receive an IRS CP2000 Notice Stating I have Unreported Income

Sign on IRS Building in Washington, DC, United States

After you file your tax return the Internal Revenue Service (IRS) will match your return information with third parties who issued you W-2’s or 1099’s. If a discrepancy occurs the IRS will issue you a CP2000 notice assessing you additional tax on any unreported income. I always tell my tax clients to email or fax me any IRS correspondence they receive immediately, because the IRS typically gives you 30 days to respond.

However, if you ignore the notice, you receive a 90 day letter to petition the tax court. I always recommend petitioning that tax court to preserve your appeal rights. However in the event you fail to petition the tax court within the 90 days, you can still apply for audit reconsideration.

The first thing I do when a client calls me is to review the CP2000 notice and make sure it is accurate because the IRS sends lots of inaccurate notices to taxpayers. In addition I verify that is actually from the IRS and not from an identity thief. I typically will file an amended return if my client has additional expenses relating to the unreported income or has basis in securities sold that generated the CP2000 in the first place. If the IRS is disallowing a deduction I will send in the documentation to substantiate it. I always try to get the accuracy related penalty abated and am successful most of the time, especially if only one year is involved.

If you receive a notice from the IRS under-reporter unit do not panic. Just contact Gregory J. Spadea at 610-521-0604 from Spadea & Associates, LLC in Ridley Park.

What Business Expenses Are Deductible?

If you are a self-employed sole proprietor or operate an LLC or S-corporation any expense that your business incurs that is ordinary and necessary is deductible under Section 162 of the Internal Revenue Code. Therefore, please list the total spent on the expense categories listed below:

Accounting, legal and professional fees;

Advertising;

Car expense need total miles driven, business miles plus parking and tolls including business log with date, miles driven, business purpose and destination or
total miles driven, actual fuel invoices, auto insurance, repairs and total miles driven and business miles plus parking & tolls;

Fixed Assets – If you bought a vehicle, computer, equipment, office furniture or placed it in service during the tax year, even if you already owned it, bring in the purchase invoice so we can expense it under IRC Sec. 179;

W-3 – Salaries that your company paid to others. List officer and shareholder salary separately;

Employer share of employment taxes like FICA and FUTA;

Commissions or fees paid to other contractors, Get them to fill in W-9 if not incorporated so we can issue them a 1099;

If you already issued them a 1099, bring in the 1096 – showing total independent contractors paid.

Professional Liability Insurance, Workmans Compensation Insurance and Health insurance;

Office Supplies;

Materials or Purchase of inventory for resale;

Travel, Hotel, Airfare and Car Rental;

Meals (need date, place, person entertained and business purpose) Only need receipt if you pay more than $75.00 and have a day timer, If you do not have a day timer or digital calendar (such as Outlook or Google Calendar) then you need a receipt for everything;

Telephone include local, long distance, fax, land lines and mobile;

DSL, cable and internet charges;

Postage;

Continuing education and business seminars and conferences;

Interest expense paid on business loans and provide year end balances;

Rent for office space or equipment;

Utilities like electricity, fuel oil, water or gas.

Prior year PA franchise (Capital Stock) tax from Page 2 of the PA RCT-101;

Prior Year Local Income Tax paid;

Total state sales tax paid if you included it in gross sales receipts.

Remember to never pay any personal expenses from your business bank account but instead transfer them to your personal account. Feel free to contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, if you have any questions or need your tax returns prepared.

Am I An Employee Or An Independent Contractor?

Woman interviewing for a job
It is important to determine if someone is an employee or an independent contractor because independent contractors have to pay for their own health insurance and the full share of the Social Security (FICA) tax. However, an employee only pays half of the FICA tax and gets benefits such as health insurance, paid time off etc.

For federal tax purposes, The IRS used to apply 20 common law rules per Revenue Ruling 87-41 to determine whether a worker is an independent contractor or an employee. However, today the IRS examines the relationship between the worker and the business. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories: Behavioral Control, Financial Control, and the Relationship of the Parties.

Behavioral Control covers facts that show whether the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Instructions that the business gives to the worker. An employee is generally subject to the employer’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

  1. When and where to do the work.
  2. What tools or equipment to use.
  3. What workers to hire or to assist with the work.
  4. Where to purchase supplies and services.
  5. What work must be performed by a specified individual.
  6. What order or sequence to follow.

The amount of instruction needed varies among different jobs. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

  • The extent to which the worker has unreimbursed business expenses;
  • The extent of the worker’s investment in the facilities or tools used in performing services;
  • The extent to which the worker makes his or her services available to the relevant market;
  • How the business pays the worker; and
  • The extent to which the worker can realize a profit or incur a loss.
  • The extent to which the worker has unreimbursed business expenses.

Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreim-bursed expenses in connection with the services that they perform for their employer.

The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out business opportunities and often advertise, maintains a visible business location, and is available to work in the relevant market.

How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is often paid a flat fee or on a time and materials basis for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss but an employee cannot.

Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:

  • Written contracts describing the relationship the parties intended to create;
  • The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship; and
  • The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

If you are an employee and think your employer incorrectly treated you as an independent contractor you can file form SS-8 and the IRS will determine your correct status. If you have any questions feel free to contact Gregory J. Spadea at Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604.

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