Retirement Funds Deadline Approaching: April 1, Don’t Miss It
Remember if you turned 70 ½ in 2016, and you have traditional IRAs, you have till April 1 to take your first required minimum distribution (RMD). This includes simplified employee pensions (SEPs) and SIMPLE IRAs that you may have set up as a business owner.
What if you don’t take it? The penalty is stiff, as in 50% of the amount you should’ve taken.
- If you turned 70 ½ before 2016, the April 1st deadline does not apply to you. You must take your RMD by December 31st each year.
- If you turned 70 ½ in 2016 and already took IRA withdrawals in 2016 or since the end of the year that equaled or exceeded your RMD, you can ignore the April 1 deadline, but...
- Keep in mind, even if you took that first RMD in 2017, it was for 2016 and you’ll still need to take another one before the end of this year for 2017.
- For all future RMDs, the deadline is December 31 of each year. To calculate your RMD that you must take, ask your tax professional or other financial advisor. But if you feel confident to do it yourself, you need to combine the balances of all your traditional IRAs (and SEPs and SIMPLE IRAs) as of December 31, 2015 and divide the total by a life-expectancy factor based on your age as of December 31,2016. You can find the life-expectancy factor in this article from Vanguard, and also a handy calculator to help you determine your RMD: https://personal.vanguard.com/us/insights/retirement/estimate-your-rmd-tool
What If You Have More than One IRA?
When you take your RMD, you may combine the balances of all of them and take the RMD from just one of them, if you wish, or some from each. Suppose your spouse has IRAs in his or her own name. In that case, the RMD rules apply separately to those accounts. If your spouse turned 70 ½ last year, make sure he or she is aware of heeding the April 1 deadline.
What about Roth IRAs?
Roth IRAs established in your name are exempt from RMDs for your lifetime. If you have an inherited Roth IRA, you’ll generally need to take RMDs, and depending on the age of the IRA, you may have to pay federal tax. Consult with your accountant to your specific situation.
An Alternative Way to Take Your RMD
If you want to donate your RMD to an IRS-approved charity, you can do so directly from your IRA. It’s called a qualified charitable distribution (QCD). This charitable donation cannot be deducted on your income tax, but the effect is better because the amount of the charitable donation is 100% free of federal tax. Note: if you receive anything for the donation, the donation is not a QCD.
The amount you may donate through a QCD is limited to $100,000 per year. If you and your spouse both own IRAs, you may each take a $100,000 QCD.
QCDs are subject to guidelines, so ask your accountant or financial planner.
What Kind of Charities Qualify?
The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.
Some charities do not qualify for QCDs:
- Private foundations
- Supporting organizations: that is, charities carrying out exempt purposes by supporting other exempt organizations, usually other public charities
- Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals
No, You Can’t Deduct That!
Why pay a tax professional to do your taxes? One reason, says Accounting Today, is to keep you from trying to deduct things that you may see as reasonable but the IRS will deem to be ridiculous and cause you an audit and maybe a penalty. We’ve all heard stories of far-fetched deductions, some of which sneak by the IRS so maybe we feel it’s worth a try. Here are a few that the members of the Minnesota Society of CPAs reported as making the list of most outrageous tax deductions this year.
A riding lawnmower. Yeah that might be deductible for some business owners. But this guy said he needed the big powerful mower to mow around the real estate signs he posted on lawns. Hmmm. The IRS thought that was overkill on a few blades of grass. Chances are they suspected the riding mower did not sit unused when it wasn’t circling small yard signs on property for sale.
Deducting Fido. Don’t we all complain that our beloved pets should be tax deductible, given that we probably spent more on their upkeep than we spend on ourselves? But unless Fido is an actual junkyard dog and you own the junkyard, you can’t claim his expenses.
Camping trailer. One client bought a pop-up camp trailer, and then called it a business expense by listing it as a construction trailer. That brought a quick smackdown.
Graduation party. Yeah… but no. One client claimed his child’s graduation party was deductible because the taxpayer made business contacts at the party. This one is as old as the idea of taxes. TV sitcoms perpetuate the belief that you can turn a lavish personal dinner into a business deduction by a simple mention of business. Wrong. The primary purpose of the meeting or event must be for business in order for it (that is, the business portion) to be deductible. But that doesn’t stop people from trying.
Snow blower and winter coat. When a taxpayer moved from California to Minnesota, he included a snow blower and winter coat in his moving expenses. Uh… no.
Private school tuition. Charity does begin at home, but not where the IRS is concerned. So when grandparents tried to deduct their grandchild’s private school tuition, their CPA had to redirect their thinking before the IRS redirected some of their return to the audit agents.
This one isn’t submitted by the Minnesota CPAs. It’s from a story I covered a few years ago. It still blows my mind.
Stripper tips might be deductible for one guy. A rapper, Aubrey Drake Graham, went to a strip club in Charlotte, North Carolina, with a cardboard box that held $50,000 in bricks of one dollar bills for tips. His friend, another rapper, arrived with another $25,000. Because they were in the entertainment business, the pair assumed they had bona fide tax deductions for this “entertainment.” They intended to use the money to “make it rain,” money.
That was in 2013. But we still don’t know what the IRS ultimately concluded about the deductibility of the “rain money.” But when this happened, an accountant that was used as a source speculated that they just might get away with it on one of two points:
- If the rapper could show that he was entertaining a client, customer, or employee in a way that wasn’t “lavish or extravagant” he might be able to get away with calling it an entertainment expense. But seriously, $50,000 might be over the line just a bit.
- If the expenditure is reasonable and directly related to the rapper’s business, it might work as an advertising or publicity expense. This particular rapper claimed it was a necessary cost of building his image so that the public would want to buy his music.
How about that? Stranger things have happened. And no doubt your accountant has seen far worse. Don’t make the mistake many taxpayers make of deliberately underreporting expenses. That won’t keep you out of an audit situation. But don’t assume something isn’t deductible. Ask a pro.
Jack Benny vs. the IRS
Even if you are too young to remember the Jack Benny Show of the ‘50s and ‘60s, you may have seen some of the reruns. Jack played himself, a comedian who nurtured a reputation as a world-class skinflint. One episode opens as Jack learns he is about to be investigated by the IRS.
With his reputation for cheapness, you might assume that this audit was based on Jack underpaying his taxes. It wasn’t. Instead, the IRS sent an agent to his home to interview him because, on his tax return, Jack claimed entertainment expense of only $3.90 on an income of $375,000. Hmmm.
(Side note: in today’s dollars, according to the Bureau of Labor Statistics, that’s an entertainment expense of less than $30 on an income of close to $2,900,000).
I don’t know about you, but I suspect that even in the ‘60s, the IRS had better things to do than check out suspected underreporting of deductions, especially entertainment expense. I won’t pretend to know what the actual tax law was during that era. After all, I didn’t appear as a tax deduction on my parents’ return until 1956, so it was a long time before I paid attention to the tax code. Today’s IRS does, of course, use target ranges to determine if a taxpayer‘s deductions exceed the averages for his or her income level. But I’m pretty sure they’ll never knock on my door to tell me I’m a cheap hostess.
If you’re wondering where Jack spent the $3.90, here’s the story. It seems he was having dinner out when he spied Mr. and Mrs. Jimmy Stewart at another table. Jack insisted that they join him. The Stewarts assumed that Jack was offering to buy their dinner, but they should’ve known better.
When the check came, Jack announced that he was going to “allow” Jimmy to pick up the whole tab because, he said, tax deductions are hard to come by. With that, Mrs. Stewart had had enough, and dumped her salad on Jack’s suit. The dry-cleaning bill came to $3.90, which Jack included on his tax return as an entertainment expense.
That’s pretty far-fetched. But mess with taxes long enough and you’ll agree, there are worse stories out there.
Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.