Janell A. Israel & Associates
March 2006 Tax Newsletter
What's New in taxes:
Should You Pay Taxes With a Credit Card?
More and more taxpayers are using their credit cards to pay the taxes they owe at tax filing time. This year, credit card companies are trying to lure even more people to use credit cards to pay the IRS. Some card issuers offer double award miles for every dollar of taxes paid with their credit cards.
If these offers look attractive to you, remember the fees that are charged by the company that processes the transaction — usually about 2.5% of the taxes paid. Also keep in mind the interest you’ll be charged by the credit card company if you don’t pay your credit card bill in full every month. You may find that the “free” miles are not so free after all.
April 3 Is An Important Deadline For Many
Retirement accounts grow tax-deferred until you need the funds. However, in most cases your money cannot remain in these accounts forever. The IRS has rules that dictate when and how much you must withdraw from your retirement accounts. The amount you must withdraw each year is called your required minimum distribution (RMD).
You can withdraw more than the required minimum distribution from your retirement accounts, but if you fail to take at least the required minimum on time, you face a severe 50% penalty.
These rules apply to traditional IRAs and qualified retirement plans, such as Keoghs, 401(k)s, SEPs, and SIMPLE plans. They also apply to 403(b)s, 457 plans, and qualified annuity plans. The rules do not apply to Roth IRAs during the owner's lifetime.
In most cases, you must begin withdrawing money from your retirement accounts as follows:
* Your first withdrawal can either be taken in the year you turn age 70½, or it can be postponed until April 1 of the following year. (That deadline is April 3 this year because April 1 falls on a Saturday.)
* Your second withdrawal must be taken by December 31 of the year after you turn 70½.
* In each subsequent year, you must withdraw at least the required minimum amount by December 31.
If you're still working at age 70½ and you own less than 5% of the company you work for, you can wait until you retire to begin taking distributions from qualified plans, such as 401(k)s. This exception does not apply to traditional IRAs.
Your retirement fund trustee must tell the IRS whether you are required to take a minimum distribution, so you need to be aware of the rules and the penalty for not complying. If you turned 70½ last year and still have not taken your first required distribution, do so by April 3 of this year. If you have questions or need assistance, give us a call.
What's New in Financial Strategies:
Prepaid tuition plans now get equal treatment
“529 plans” are one way to set aside money for children’s college educations. These plans come in two varieties: (1) prepaid tuition plans where you make a lump sum payment or make payments to lock in tuition for your child when he or she is ready for college, and (2) college savings plans that allow you to put money into investments and use this fund to pay for college expenses tax-free.
A recent bill signed into law by President Bush equalizes the treatment of these two varieties of Section 529 plans in calculating eligibility for federal financial aid for students. Previously federal aid was reduced by one dollar for every dollar withdrawn from a prepaid tuition plan.
Now prepaid tuition plans will be treated for federal aid purposes the same way college savings plans are treated — as an asset belonging to the account owner (typically the parent) and not to the student. Under the federal formula, a maximum of 5.64% of both types of plans will be counted for reducing a student’s eligibility for aid.
Are your beneficiary designations up to date?
Who have you designated as beneficiaries for your insurance policies and retirement accounts? If you can't remember, you're not alone. But it's worth checking, and right now is the perfect time to do your review. If you make the wrong decision, it could affect who inherits those assets. In some cases, it can change the future value and taxes on the accounts.
You designate beneficiaries for insurance policies and accounts such as IRAs, annuities, and 401(k) plans. Your designation determines who will inherit those accounts, regardless of what your will might say. Assets with beneficiary designations bypass probate and go straight to the person you've chosen. That's why it's important to keep designations up to date. Your wishes might have changed as births, deaths, or marriages occur in your family. Or some of your beneficiaries may no longer be living.
There can be tax implications too. With some IRAs, choosing the wrong beneficiary, or failing to name a contingent beneficiary, can change the timing of when withdrawals must be made and taxes paid. That's why you should always choose beneficiaries after careful consideration of tax issues.
Follow these four steps to update your designations:
* Start by pulling together copies of all your current designations. Contact your insurance company and plan trustees to obtain copies if you can't find them.
* Go over them and decide what changes you'd like to make. Make an appointment to review the changes with your tax or estate planning advisor.
* Discuss matters such as naming secondary beneficiaries and naming your estate as a beneficiary (sometimes not a good idea).
* Send your updated designations to the account trustees. Make sure you receive confirmations, and keep copies in your records.
Take a Break
Some tax trivia…
* President Lincoln introduced the income tax in 1862 to finance the Civil War.
* The 16th Amendment to the Constitution established our current income tax in 1913.
* The 1913 Form 1040 was only three pages, with one page of instructions.
* The 1913 tax law had about 11,000 words; today’s tax law has over 7,000,000.
An Irish Friendship Wish
* May there always be work for your hands to do;
* May your purse always hold a coin or two;
* May the sun always shine on your windowpane;
* May a rainbow be certain to follow each rain;
* May the hand of a friend always be near you;
* May God fill your heart with gladness to cheer you.
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.
Notice required by U.S. Treasury Regulations: Be aware that this communication is not intended to be used, and it cannot be used, for the purpose of avoiding penalties under