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Do You Need a Friend at the IRS?

As taxpayers, many of us have faced difficulties in dealing with the IRS – and it can be a daunting position to be in. One way to deal with these issues is to hire a CPA or Enrolled Agent to help you through the process. Another way is to deal with it yourself. The problem is that dealing with the IRS by yourself can be a very difficult thing to do.

The good news is that you have a friend at the IRS: The Taxpayer Advocate Service (TAS).  The purpose of the TAS is to help taxpayers:

  • whose problems with the IRS are causing financial difficulties;
  • who have tried but have not been able to resolve their problems with the IRS; and
  • who believe an IRS system or procedure is not working as it should.

The IRS has listed ten things that they believe every taxpayer should know about TAS:

  1. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS and is your voice at the IRS.
  2. We help taxpayers whose problems are causing financial difficulty. This includes businesses as well as individuals.
  3. You may be eligible for our help if you’ve tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn’t working as it should.
  4. The IRS has adopted a Taxpayer Bill of Rights that includes 10 fundamental rights that every taxpayer has when interacting with the IRS:
    • The Right to Be Informed.
    • The Right to Quality Service.
    • The Right to Pay No More than the Correct Amount of Tax.
    • The Right to Challenge the IRS’s Position and Be Heard.
    • The Right to Appeal an IRS Decision in an Independent Forum.
    • The Right to Finality.
    • The Right to Privacy.
    • The Right to Confidentiality.
    • The Right to Retain Representation.
    • The Right to a Fair and Just Tax System.

      Our TAS Tax website at can help you understand these rights and what they mean for you. The website also has examples that show how the Taxpayer Bill of Rights can apply in specific situations.

  5. If you qualify for our help, you’ll be assigned to one advocate who will be with you at every turn. And our service is always free.
  6. We have at least one local taxpayer advocate office in every state, the District of Columbia, and Puerto Rico.  You can call your advocate, whose number is in your local directory, in Publication 1546, Taxpayer Advocate Service — Your Voice at the IRS, and on our website at You can also call us toll-free at 877-777-4778.
  7. The TAS website at has basic tax information, details about tax credits (for individuals and businesses), and much more.
  8. TAS also handles large-scale or systemic problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at
  9. You can get updates at:
  10. TAS is here to help you, because when you’re dealing with a tax problem, the worst thing you can do is to do nothing at all.

Required Minimum Distributions (RMDs) Don’t Have to Be in Cash, But…

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Here’s something that I bet you’ve never run across – when you have to begin taking Required Minimum Distributions (RMDs) from your IRA or Qualified Retirement Plan (QRP), most folks think you must take these distributions in cash.

This is not the case, you can actually take distributions of any sort, not just RMDs, from your plan (IRA or QRP) in either cash or “in kind”. By “in kind”, this means that you can take the actual securities (stocks, bonds, or other investments) from the account. These distributions in kind can be used to satisfy your RMD for the year. There can be both pros and cons to taking distributions in kind.

Pros in favor of in-kind distributions

You might want to consider using an in-kind distribution if your IRA or QRP is fully invested and you want to keep it that way. Sometimes (such as in a market downturn) it can be beneficial to maintain a cash position, but generally it’s often in your best interest to remain fully invested. Using an in-kind distribution will allow you to remain fully invested before and after your distribution.

Another reason that you might want to use an in-kind distribution is if you have a particular position in a stock or limited partnership (for example) that you consider to be undervalued, such that it will appreciate considerably after you’ve distributed it. This would put you in a position to have your gain (beginning with the date of distribution) taxed at capital gains rates rather than ordinary income tax rates.

In this second case you need to understand that you’d be taxed at ordinary income tax rates on the value of the distribution (on the day of the distribution) and your basis in the position will be set at that value. Future gains will be considered against that basis.

In addition, if you don’t have to cash out of a position in order to distribute it, you wouldn’t incur a trade commission.  Assuming that you would just re-invest in the same or a similar security, you’d then incur another trade commission when you made the new purchase. So distributing in-kind can cause a double commission to be paid, which may not be necessary.

Cons against in-kind distributions

Sometimes it can be difficult to value a security – for example if it is very thinly-traded. In a situation such as this, distributing the RMD in-kind can cause difficulties, especially if you’re hoping to minimize the distribution to only the required minimum.

With this in mind, in order to reduce confusion and ensure that you’re taking the correct amount in your RMD, it can be prudent to maintain or create a cash holding that will be sufficient for your RMD.


It’s important to keep in mind that no matter how you take your distributions, you’ll have to pay ordinary income tax on the distribution – and the tax may be pro-rata if the IRA is partly non-deductible.

IRS Penalties – 8 Facts You Need to Know


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There are generally two ways that the IRS can assess a penalty to you – failure to file, or failure to pay; and it’s not out of the question that you could be subjected to both types of penalties. There are many other penalties, such as accuracy-related penalties, that may also apply. Listed below are some facts from the IRS about penalties.

Facts on Penalties

  1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
  2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and explore other payment options in the meantime. The IRS will work with you.
  3. The penalty for filing late is usually 5% of the unpaid taxes for each month or part of a month that a return is late.  This penalty will not exceed 25% of your unpaid taxes.
  4. If you file your return more than 60 days after the due date or extended due date, the minimum failure-to-file penalty is the smaller of $485 or 100% of the unpaid tax.
  5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½% of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.  This penalty can be as much as 25% of your unpaid taxes.
  6. The ½% increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. If you file your return by its due date and request an installment agreement, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect.
  7. Be aware that the IRS applies payments to the tax first, then any penalty, then to interest. Any penalty amount that appears on your bill is generally the total amount of the penalty up to the date of the notice, not the penalty amount charged each month.
  8. If you timely filed a request for an extension of time to file and you paid at least 90% of your actual tax liability by the original due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.
  9. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $485 or 100% of the unpaid tax.
  10. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
  11. Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily.

Limits on Social Security Disability Coverage

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When you leave full-time employment, there is a period of time after that when you will continue to be covered by Social Security Disability Benefits. Welcome to the 20/40 Rule.

The 20/40 Rule

If you have become disabled after you’ve left employment, you may be eligible for Social Security Disability Benefits – assuming that you’re under Full Retirement Age (FRA). In a case such as this, if you have worked the required number of quarters to be eligible for Disability Benefits, the rule is that you must have worked 20 quarters out of the previous 40 quarters, earning at least the minimum.

This is the 20/40 Rule. The quarters don’t need to be consecutive, but it must be 20 out of the 40 quarters just prior to the onset of the disability. Another way to look at it is that for five years after you leave employment you will continue to be covered by Social Security Disability Benefits, again assuming that you’re under FRA.

If you work, even part-time, ($1,730 earned in a quarter for 2024), this will count as a quarter for your coverage.

The 20/40 Rule is adjusted for age, as well. If you’re under age 24 when you become disabled, you must have worked for 6 quarters out of the prior 12 quarters before you become disabled. Between ages 24 and 31, the numbers are half of the quarters after your age 21 – so if you’re 29, you would need to have 16 of the 32 quarters after your age 21. After you reach age 31, the 20/40 Rule lives up to its name – 20 quarters out of the prior 40.

Once you reach FRA, Social Security Disability Benefits are converted to Retirement Benefits, so this rule doesn’t apply any more.

How a Spouse Can Stretch an Inherited IRA

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If you or someone you know has inherited an IRA from a spouse, there are several options available for handling the account. You could transfer the IRA to an inherited IRA, properly titled, and begin taking RMDs based upon your own age; or you can transfer the IRA to an IRA titled in your own name and treat the IRA as your own. Each option has merit, you just need to determine which is best for you.

Take the IRA as an inherited IRA

If you transfer the IRA to an inherited IRA, you can immediately begin taking RMDs based upon your own age, using IRS Table I.  This will allow you to stretch out the payments you would receive from the IRA over your lifetime, without penalty. If you have need for some of the funds now but wish to defer withdrawal over a longer period of time.

You could also take withdrawals in any amount you wish (or take no withdrawals in some years), but completely drain the account by the end of the 10th year after the death of your spouse. There could be some benefit to this method – you would not have to take distributions at all for the first 9 years, and then take the entire account during the 10th. Your tax plan might fit in with this scenario, for example, if you’re still working and taking significant distributions earlier would push you into higher tax brackets.

This option, the 10-year payout, is only available if the original owner (your spouse) was not already subject to RMDs.

Take the IRA as your own

If you decide to make the IRA your own, you can treat the IRA exactly as if it were your own: you can make contributions to it, rollover other eligible funds into it, or convert it to a Roth IRA. In this case, you can delay the time to start taking RMDs until you reach age 73 – so if you are younger than your late spouse was, this method may allow you to delay RMDs the longest.

In this method, any withdrawals that you take before age 59½ could be subject to the 10% early withdrawal penalty, unless you meet one of the exceptions. You can transfer the IRA to an account in your own name at any time during the first five years, even if you’ve taken some distributions from the originally-titled account. You couldn’t take this option if you had re-titled the account as inherited (the option above), however.

Bear in mind, the above options are not every possible option for handling an inherited IRA as a spouse. For more detailed reading, check out IRS Publication 590.

Tax Deductions for Property Damage from Disaster

Damage left by an EF1 tornado
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If violent weather has caused damage to your property, you may be able deduct a part of the cost of the damage from your taxes, if the event was a federally-declared disaster.

You are generally eligible to deduct losses that result from federally-declared disasters. This can include, here in the Midwest, such mundane items like floods or tornados, plus the occasional derecho. In California, it might include (per Jimmy Buffett) riots, fires, mudslides and sushi in the mall*. Remember that the deduction amount is limited by any amount that you recover by way of insurance.

Riots and sushi may not actually included. Consider it poetic license.

If you’re in a presidentially-declared disaster area, there are special rules that apply to you. You are eligible to deduct those losses that occurred in the specific event in a current tax year on either your current or prior year tax return, whichever is more beneficial to you. If you’ve already filed the return for the prior year you can amend it with the casualty loss information to get a refund. For more information, go to

When a qualified federally-declared disaster has impacted you, you may have more options available to you. For more information on types of losses, see IRS Pub 547 for detailed definitions of the casualty loss (within the state of a declared disaster), disaster loss (within the county of a declared disaster), and qualified disaster loss (certain specified disasters). For these qualified disaster losses, you are allowed to itemize the loss deduction without regard to other itemized deductions. The 10% floor limitation mentioned below does not apply, but the disregarded “first amount” is $500 instead of $100.

If you have otherwise experienced a loss due to damage from one of these natural disasters, this is classified by the IRS as a casualty loss. Casualty losses are deducted using IRS Form 4684. Deductible losses are limited in two ways for individuals: the first $100 is not deductible; above that amount, your deductible loss is limited to the amount that is greater than 10% of your Adjusted Gross Income (AGI). You must itemize deductions in order to deduct a casualty loss as an individual.

Losses from other events that are not federally-declared disasters are not eligible for a deduction during tax years 2018 through 2025. We’ll have to wait and see if the deduction is restored after 2025.

For a business, the limits mentioned above are not in affect, and they do not need to be claimed as itemized deductions.

Did You Break Your SOSEPP?

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If you don’t know what a SOSEPP is, that’s okay – chances are if you don’t know what it is, you don’t have one. SOSEPP stands for Series Of Substantially Equal Periodic Payments. It’s a method that you can use that allows you to take a series of distributions from your IRA prior to age 59½ without being subject to the 10% early withdrawal penalty.

The SOSEPP is a very complicated avenue to travel, and there are some specific restrictions that you need to follow. One of the restrictions is that you absolutely must maintain the “equality” of payments you’re taking from the IRA. If you increase or decrease the payments, you may have “broken” the SOSEPP.

There is no specific provision in the Internal Revenue Code for relief from the penalty if you have broken your SOSEPP. On the other hand, the IRS has in some cases granted relief in several private letter rulings by determining that a change in the series of payments did not materially modify the series for purposes of the rules.

If the series is broken due to an error by an advisor (for example), some prior PLRs have been issued in favor of the taxpayer. PLR 201051025 and PLR 200503036 each address the situation of an advisor making an error and the distributions were allowed to be made up in the subsequent year. Bear in mind that PLRs are not valid for any other circumstances other than the specific one in the ruling, and cannot be used to establish legal precedence for subsequent cases.

But in reality, the likelihood of your getting a favorable PLR for your case of a broken SOSEPP is small. Unfortunately, breaking the series usually results in application of the penalty for previous payments received, and the SOSEPP is eliminated. This means that, back to the beginning of your SOSEPP, each payment that doesn’t meet some other exception will be hit with the 10% early withdrawal penalty.

If you wish to restart the series after having broken it you can do so, but you’ll be starting with a new five-year calendar (the series must exist for at least five years, or until you reach age 59½, whichever is later).

Forget your RMD? Here’s What to Do

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If you have an IRA that you have to take Required Minimum Distributions (RMDs) from, you need to do this every year by the end of the year.  So what if you forget one year?

The rule is that if you don’t take your RMD by the end of the year, you could be subject to a penalty of 25% of the amount of the RMD. If you’ve realized your error before the IRS has notified you, there are a few things you can do to try to resolve the situation. There may even be a way to resolve it even though the IRS has caught on, as well.

The very first thing you should do is immediately withdraw the RMD in the amount that you should have in the previous year. Contact your IRA custodian and request the distribution as soon as possible. It is recommended that you take this as a separate distribution, in exactly the amount prescribed (more on this later).

Then, if you’ve already filed your tax return for the previous year, fill out out Form 5329 for that specific year.  If you haven’t filed yet, go ahead and file the Form 5329 with your regular Form 1040 return. To find the old forms, to the the and search for the year you need (

Form 5329 is the form that you use to report additional taxes on your IRA accounts – in this case you’re reporting the fact that you “overaccumulated” by not taking your appropriate RMD. You’re concerned with section IX on the form (Additional Tax on Excess Accumulation…). Fill out line 52 with the amount of the distribution you should have taken, and put zeros in 53-55. On the dotted line next to line 54 (the subtraction line), place the following – RC ($1,000) – this is if the distribution was $1,000. Update with your actual figure. (Note: I used the form from 2021, the form you use might have different line numbers.)

The RC notation indicates that you believe you missed this distribution due to a reasonable cause. A reasonable cause is generally something outside of your control, such as your custodian did not indicate to you that a distribution was necessary. Other reasonable causes could include a health issue or death of your spouse, for example. Simply forgetting is generally not a reasonable cause, but if you have some plausible explanation, give it a shot. If the IRS disagrees, they’ll send you a bill for 25% of the amount of the RMD.

Include a letter with the return, asking for a waiver of the penalty, explaining why you missed the RMD (your reasonable cause), and that as soon as you realized it you corrected your error by taking the distribution. The IRS may let you off the hook – it’s easier for them to do this for taxpayers than to hunt you down and send you a bill.

It’s not fool-proof, but it’s the best chance that you have at this stage. And then figure out a way so that you don’t get into this position again in the future. For example, set up an automatic distribution plan by having an adequate amount sent to you monthly or quarterly.  Make sure that you adjust this annually to match that year’s RMD. This way maybe you won’t have this problem next time around.

If you simply forgot and don’t have a reasonable cause for the omission, fill out Form 5329 as the instructions explain, indicating the amount you owe in additional tax, and send that amount along with your signed form.

The Protective Filing Statement


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When planning for your Social Security benefits, there is an additional tactic that you may never have heard of: the Protective Filing Statement. This statement is a way to apply for benefits without actually applying.


At any time after you reach age 62 (for retirement benefits), you can file the Protective Filing Statement (PFS) which will “protect” the date of acceptance as your application date, whenever you choose to apply in the future. And when you do apply, the PFS date will be considered your filing date – and you’ll get retroactive benefits back to that date, as long as you’ve applied within the closeout window. For retirement benefits, the closeout window is 6 months. For SSI, it’s only 60 days, and can be as much as 12 months for SSDI.

Protected filing is probably most important for SSI and SSDI, because you may wish to file for benefits before you’re approved in order to receive back-payments once approved. It can be useful for retirement benefits as well, although after FRA you are allowed up to a 6-month retroactive date, but no earlier than your FRA date. We’re only covering protected filing for retirement benefits in this article.

For retirement benefits, after the PFS is filed, the SSA will issue a notice indicating that you must file within six months. This doesn’t mean that you have to file within six months, it just means that, in order to retroactively file as of your protected date, your actual application must have been filed no later than six months after the protected date.

How does this work in practice? Let say that you reach age 62 in February this year. You’re actually eligible for benefits in March, since you weren’t 62 for the entire month of February… so you file a PFS in March. You’re not ready to collect benefits, but you want to protect your date. Then in July your company “reorganizes” (we all know that really just means layoffs). Instead of seeking other work, you decide to just go ahead and retire. When you file your application for Social Security benefits in August, your actual filing date can be retroactive to March, since you filed a PFS.

If your income for the year was low enough, you might go ahead and take the retroactive benefits – but the key here is that without the PFS you would forego those benefits altogether. It’s for this purpose that it makes sense to file a PFS from time to time if you’re delaying receipt of benefits sometime after age 62.

How to do it

There’s nothing magical about the PFS – it’s simply a statement you’ve made to the SSA indicating that you’re intending to file at some point in the future. You don’t have to set a date when you actually file and stick to it, you just need to indicate that you’re intending to file. Here are the requirements:

  • Must be in writing
  • Must indicate an intention to claim in the future
  • Must be signed by the applicant
  • Must be submitted to your local district office

And that’s it. A few words of caution are in order: Keep a date-stamped copy of your PFS. If you hand-deliver the statement (recommended) to the district office, ask the representative to photocopy the statement and date-stamp your copy. Occasionally these get lost, and without a copy of your statement, it will be impossible to prove that you submitted it.

If mailing the statement, make a copy beforehand, and then send the statement by registered or certified mail. This way you’ll have evidence of delivery.

It’s also important to note the six month limit for the PFS (for retirement benefits). After six months has passed, the PFS is no longer in effect, and if you apply at that stage, unless you’ve filed a subsequent PFS, the date of your application is your filing date, with no retroactivity unless you’re over FRA.

Required Minimum Distributions and the Successor Beneficiary


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If the beneficiary of an inherited IRA dies before exhausting the inherited IRA or qualified retirement plan (QRP) through distributions, how are the ongoing distributions to be handled?

In this case, there is no Eligible Designated Beneficiary, regardless of your status with regard to either the original IRA owner or the beneficiary.

As a successor beneficiary (the beneficiary of an original inherited IRA’s beneficiary), upon the death of the original beneficiary you would continue to use the same distribution plan as the original beneficiary, with a new 10-year time period to fully distribute the account.

This means that by December 31 of the year that includes the 10th anniversary of the death of the original beneficiary, the entire account must have been fully distributed.

The Affect of Earnings on Your Social Security Benefit

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Your wage earnings and other income can impact your Social Security benefit in several ways. These earnings can increase the amount of your Social Security benefit that is taxable. In some cases, continued earnings can increase your future benefit rate as well. Wage earnings while collecting benefits can also reduce your current benefit if you’re over the annual earnings limits and you’re under Full Retirement Age. Continued wage earnings at or above the substantial earnings limits can also result in a smaller WEP reduction, or perhaps eliminate WEP altogether.


Depending on your level of income, Social Security benefits may be included at as high as an 85% rate with your other taxable income on your tax return. But this level can range to as little as 0% if your provisional income (all of your other income besides Social Security benefits plus 1/2 of your Social Security benefit) is low enough.

For more details on how this works, check out this article on taxation of Social Security benefits.

Increasing future benefits

When you continue to work, depending on your wage income (or net self employment income), you may be increasing your future benefits. This happens when you have relatively low income reported in some earlier years (or perhaps zero income) and those low or zero years are included in your top-35 years of indexed earnings on record with Social Security.

To see how your benefit might increase, here’s an article about the calculation of the Average Indexed Monthly Earnings (AIME), which is used then to produce your Primary Insurance Amount (PIA) – a critical figure in determining your Social Security benefit amount.

Reducing current benefits

What happens if you are earning a significant amount of money (more than the limits) and you decide to go ahead and begin receiving your benefit before Full Retirement Age (FRA)?

When you’re under FRA, wage earnings greater than the limits will result in a $1 for $2 over the limit reduction to your annual benefits. Eventually at FRA you’ll get credit for those withheld benefits, but in the meantime your benefit is reduced by the over-earnings.

If you’re already at or older than FRA, you have no limit on your earnings, either as an employee or as a self-employed individual.  Your earnings have no negative impact on your Social Security retirement benefit, although if your earnings are significant and more than some of your earlier earnings years, your future benefits could possibly increase as mentioned above. In addition, any benefits that your dependents or spouse may be receiving that are based upon your record are also not impacted by your earnings at this stage.

Smaller or eliminated WEP reduction

If your earnings from SS-covered wages are at or above the substantial earnings limits, you can gradually eliminate the impact of WEP reduction on your benefits. Once you have 20 or more years of these substantial earnings, WEP’s impact begins to shrink with each added year of substantial earnings. When you reach 30 years of substantial earnings covered by Social Security, WEP is effectively eliminated for you.

For more on how this works, see this article on substantial earnings with regard to WEP.

Which Retirement Account Should You Tap First?


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If you have multiple options of various different kinds of accounts to choose from, such as an IRA, a Roth IRA, a qualified retirement plan (such as a 401(k) plan) also known as a QRP, and perhaps an inherited IRA; you may be asking yourself: which one should I withdraw from first?

If you’re under age 59½, some of the options include considerable penalties – withdrawals from either the traditional IRA or the QRP will incur a 10% penalty for early withdrawal unless you meet one of the exceptions. So this leaves the Roth IRA or the inherited IRA. Each of these can be taxable to some degree, or partly non-taxable, depending upon the circumstances.

If the inherited IRA was subject to estate tax upon the passing of the original owner, you may be able to take a portion of your withdrawal in credit against the estate tax, due to the IRD tax deduction. In today’s world, this is less and less likely due to the increased estate tax exemption of $12+ million, but it’s still something to consider in your quest.

If you’re age 59½ or older and still working, the 10% penalty will not apply to any of your accounts, but that doesn’t mean that your choice is completely unlimited with no consequences. There are still tax issues to consider, as well as other affects that the law places on you as the owner of these accounts.

At any age, your contributions and conversions more than five years old can be withdrawn from your Roth IRA without tax or penalty. Any growth in the account will be subject to tax and penalty, and any conversions that were completed less than five years ago will also be subject to the 10% penalty.

Since you’re required to take a distribution from the inherited IRA (if you’re not the surviving spouse in some cases), this is where you’ll be taking a withdrawal no matter what other circumstances are occurring. If your need for money is greater than the Required Minimum Distribution (RMD) from the inherited IRA, then the most tax efficient option is to take a withdrawal of your contributions to the Roth IRA.

After those choices, you also could take a loan from your 401(k) plan (as long as this is available). This would be another option that is tax efficient (in general) but you would need to pay back the loan, and in turn this is a good way to derail your retirement savings. This could also result in taxation of your loan amount if you leave employment.

Lastly, you can always take money from your IRA and pay the taxes and penalties. This is probably the least desirable of all the options, as it is the most costly.

Something else to consider, if you have an inherited IRA and you’re not the surviving spouse: you’re required to take the RMD from the account each year, and this can often be a nuisance to keep track of. If you’re in need of money you can take extra from the inherited account and this will reduce future RMDs or perhaps eliminate them if you drain the account. Of course each dollar withdrawn is likely subject to ordinary income tax.

The other thing that makes the inherited IRA the better choice (over your other retirement accounts) is that you can defer use of these accounts until you reach age 73 (for your entire lifetime for the Roth) – and the rate of withdrawal will be less than with the inherited IRA.

In addition, for your owned accounts (non-inherited) your beneficiaries of those accounts can stretch payments over 10 years, or their lifetimes if they are specially eligible designated beneficiaries.

Once you reach age 73 (if born between 1951 and 1959), you must begin taking distributions from your IRAs and QRPs. These are a required minimum amount each year, so you can take the minimum and augment that amount by withdrawing from your Roth IRA options if you have them available.

As in earlier ages, you still need to withdraw the RMDs from your inherited IRAs, this continues throughout your life or as long as there is money in the account.

The goal should be to keep current taxes to a minimum, so using the Roth account may be a good option if you need more money than the RMDs provide for you. However, your Roth IRA is the one account that never requires you to take withdrawals during your lifetime. This can result in a legacy to provide for your heirs – one that will have no tax consequences to your beneficiaries.

How to Get Your Prior Year Tax Return Information From the IRS

2018 Form 1040If you’re trying to find information from your prior years’ tax returns and you don’t have the old forms (who has the space to keep all that!?), you have a few options available to you.

Generally speaking, your tax preparer should have old records for you – as long as it wasn’t too long ago. Sometimes this is a challenge for the preparer, as changes to software and office systems can result in difficult to retrieve records, although within reason your preparer should be able to get the forms for you.

If your preparer either doesn’t have the information or you’re reluctant to approach the preparer for the information, or you’ve moved, or the preparer is no longer in business, you have another option available to you: the IRS.

According to this IRS Tax Tip, there are things you need to know if you need federal tax return information from a previously-filed tax return.

Taxpayers who didn’t save a copy of their prior year’s tax return, but now need it, have a few options to get the information. Individuals should generally keep copies of their tax returns and any documents for at least three years after they file.

If a taxpayer doesn’t have this information here’s how they can get it:

Ask the software provider or tax preparer

Individuals should first check with their software provider or tax preparer for a copy of their tax return.

Get a tax transcript

If a taxpayer can’t get a copy of a prior year return, then they may order a tax transcript from the IRS. These are free and available for the most current tax year after the IRS has processed the return. To protect taxpayers’ identities, this document partially hides personally identifiable information such as names, addresses and Social Security numbers. All financial entries, including the filer’s adjusted gross income, are fully visible. People can get them for the past three years, and they need to allow time for delivery.

Here are the three ways to get transcripts:

  • Online. People can use Get Transcript Online to view, print or download a copy of all transcript types. They must verify their identity using the Secure Access process. Taxpayers who are unable to register or prefer not to use Get Transcript Online may use Get Transcript by Mail to order a tax return or account transcript type. Taxpayers should allow five to 10 calendar days for delivery.
  • By phone. Taxpayers can call 800-908-9946 to request a transcript by phone. Transcripts requested by phone will be mailed to the taxpayer.
  • By mail. Taxpayers can complete and send either Form 4506-T or Form 4506-T-EZ to the IRS to get one by mail. They use Form 4506-T to request other tax records: tax account transcript, record of account, wage and income and verification of non-filing. These forms are available on the Forms, Instructions and Publications page on

Request a copy of a tax return from the IRS

Prior year tax returns are available from the IRS for a fee. Taxpayers can request a copy of a tax return by completing and mailing Form 4506 to the IRS address listed on the form. There’s a $43 fee for each copy and these are available for the current tax year and up to seven years prior.

10% Penalty Applied to Roth Conversion? Maybe


Photo credit: jb

In general, when you withdraw funds from an IRA prior to age 59½, your withdrawal is subject to both income tax and the 10% early withdrawal penalty. The 10% penalty is waived if your withdrawal is for one of the exception categories, including first-time home purchase, certain medical expenses, and the like. For a complete list of the exceptions, see the article I had previously written which provides links to the various exceptions to the 10% penalty.

One of the exceptions to the penalty is a withdrawal for a Roth Conversion. You still must pay ordinary income tax on the conversion, but generally the 10% penalty will not apply to amounts converted from a traditional IRA to a Roth IRA.

However (and there’s always a however in life), there are a couple of situations where the 10% penalty could impact you as you enact your Roth Conversion.

Funds used to pay the tax

If you used some of the funds from your Roth Conversion to pay the tax on the conversion, then effectively those funds were not converted. Therefore, if you’re under age 59½, the 10% penalty will apply to those funds that you used to pay the tax on the conversion.

For example, if you withdrew $50,000 from your traditional IRA to convert to a Roth IRA, but pulled out $5,000 to pay the tax on the conversion, then you really only converted $45,000 into the Roth IRA – and the $5,000 was withdrawn for other purposes than the conversion – so therefore subject to the 10% penalty. The entire $50,000 withdrawn from the traditional IRA would also be subject to ordinary income tax, as you might expect.

Funds withdrawn within the first five years

When you convert funds from a traditional IRA to a Roth IRA and you’re under age 59½, the converted funds are restricted from withdrawal for the lesser of five years or until you reach age 59½. If you withdraw the converted funds from the Roth IRA prior to the date the restriction is lifted, your withdrawal will be subject to the 10% penalty.

This restriction is in place to keep a taxpayer from converting funds to a Roth IRA prior to age 59½ (avoiding the 10% penalty) and then immediately withdrawing the funds from the Roth IRA account, thereby effectively taking a withdrawal from the traditional IRA without penalty. By requiring a delay for such withdrawals of up to five years, this strategy will lose its luster for someone who is hoping to use it to his advantage.

It does provide a way for an individual to do some advance planning if he or she chose to do so, though…

Advance Planning Strategy

Imagine if you were age 50 and hoped to retire in five years. You have a traditional IRA, amounting to $250,000, plus a pension and a 401(k) plan at your employer. You know that you’ll need $50,000 per year to live on during the years of age 55 to 60 – so you could convert $50,000 per year for the next five years, paying the tax from other sources.

Then you would have $50,000 per year available to you, beginning at age 55, that would be totally free from tax and penalty, since the conversion occurred more than five years in the past. When you reach age 60 you’ll have unencumbered access to your other sources of income (since you’re over age 59½), and in a few years you’ll have Social Security available as well.

It’s not a strategy that will work for everyone, but in certain circumstances it might work well for you.

NOTE: You’d want to plan this out very carefully so that you don’t trip up on any of the conversion dates and your future withdrawal dates.

More Clarification on Rollovers and Transfers

rollover waiver

Photo credit: diedoe

I’m compelled to provide an additional update to the posts I’ve provided in the past in the article Running Afoul of One Rollover Per Year Rule and its follow-up More on the One-Rollover-Per-Year Rule. This is primarily to provide clarity to a portion of this rule that I personally was unclear on when the articles were originally written.

The rule is that you are restricted to one IRA rollover in a 12-month period. So let’s define a few things for the purpose of this discussion:

Rollover – this is when you move money from one IRA to another, first taking possession of the funds prior to depositing the funds into the new (or the same old) IRA account. You have 60 days to complete this process. At the end of the tax year you’ll receive a 1099R from the original custodian, with a distribution code of 1 or 7 (this form is important to the rule).

Transfer – Also known as a trustee-to-trustee transfer or a direct rollover, in this case you do not take possession of the funds, they are transferred directly from one IRA to another. Another possible way this could occur if you receive a check from the old custodian made out to the new custodian. Typically this sort of movement of funds does not generate a 1099R at the end of the year, as you’ve not actually made a distribution – no taxable event has occurred.

12 months – this really means a full year, 365 days in a normal year, 366 days in a leap year.

The Rule

Now that we have our definitions, here is the rule:

You are restricted to only one Rollover for ALL IRA accounts that you own, either receiving or distributing during a full 12 months from the date of the first distribution.

Transfers are not influenced by this rule. You are allowed to make as many transfers between IRAs as you like, uninhibited by the rule.

An example is in order: You have an IRA at Mutual Fund Company A, and you take a rollover distribution, after which you deposit the money into your IRA account at Brokerage B. You are restricted in that you cannot make any other rollovers into or out of any IRAs that you personally own, except for inherited IRAs, which you are not allowed to make a rollover distribution from anyway (only transfers are allowed). IRAs owned by your spouse are also not limited by actions you’ve made with IRAs that you own.

Roth IRA Conversions and Recharacterizations do not apply to this rule either – these are different sorts of distributions, and can be taxable events, but are not subject to this rule’s restriction.

Lastly, the rule does not apply to rollovers into or out of Qualified Retirement Plans (QRPs) such as a 401(k). You are free to do as many rollovers into or out of an IRA to/from QRPs with no time restrictions. This can often give you an extra advantage if you really need to move money again and a transfer is not in order.

Hopefully this has helped to fully clarify the rule.

Avoid Errors In Your Tax Filing


Photo credit: jb

As we approach the extended income tax filing deadline, folks all over the country are in a mad rush to fill out returns and complete the filing process. Software for return preparation has helped to resolve a lot of the issues and errors that occur in filing your returns, but still errors occur – there’s no way to completely fool-proof the process.

Below is a list that was published by the IRS, entitled Tax-Time Errors Filers Should Avoid:

Tax-Time Errors Filers Should Avoid

Mistakes on tax returns mean they take longer to process, which in turn may cause your refund to arrive later. The IRS cautions against these nine common errors so your refund is timely.

  1. Incorrect or missing Social Security Numbers When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.
  2. Incorrect or Misspelling of Dependent’s Last Name When entering a dependent’s last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.
  3. Filing Status Errors Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.
  4. Math Errors When preparing paper returns, review all math for accuracy. Or file electronically; the software does the math for you!
  5. Computation Errors Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.
  6. Incorrect Bank Account Numbers for Direct Deposit or Debit If you are using direct deposit for a refund or direct debit for a payment, make sure that you review the routing and account numbers for your financial institution.
  7. Forgetting to Sign and Date the Return An unsigned tax return is like an unsigned check – it is invalid. And, remember on joint returns both taxpayers must sign the return (another item that is not necessary when filing electronically, although electronic signatures, authorization, are required).
  8. Incorrect Adjusted Gross Income Information Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from the originally filed federal income tax return for the prior year, or the PIN number used previously if they used a PIN for the prior year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by the IRS.
  9. Figuring Credits or Deductions Taxpayers can make mistakes figuring things like their earned income tax credit, child and dependent care credit and child tax credit. Tax software will calculate these credits and deductions and include any required forms and schedules.

Advice on Social Security Benefits

I get a lot of questions about when to take Social Security benefits most efficiently, and when to begin Spousal Benefits. And unfortunately, I am often at a loss for giving a specific answer to the individual, because I just don’t have enough information.

Social Security planning has very many factors that must be considered – for example:

  • It’s important to consider earnings from your job if you’re filing early and continuing to work (see Social Security Earnings Tests for more information), as this can impact the amount of benefits you actually receive.
  • Your health status and longevity are critical to the equation as well – since delaying strategies often rely on your longevity to achieve payback (more information in the article Your Payback from Social Security).
  • Of course, your marital status is important to the equation as well. If you’re married, you should think about Spousal Benefits and Survivor Benefits in addition to your own benefit. And if you’re divorced or widowed, additional considerations must be brought into the equation as well.
  • Probably the most important of all – do you need the money right now? Too often this factor is overlooked in our zeal to “get our money back”. As you’ll see in this article on delaying benefits, it can be very worth your while to delay receiving benefits – but again, this shouldn’t be done blindly.

Each individual’s circumstances has other factors to consider as well. Your overall retirement plan has to be the context against which these factors should be considered.

As you take these factors and others into account, it’s important to perform break-even analysis on your benefits at various ages, along with that of your spouse (if you have one). Then it’s up to you to decide what makes the most sense in your situation. If you have a trusted advisor that you can work with to help you with your analysis, all the better.

And lastly, if I can help you with this analysis, this is what I do for a living. As always, I am happy to help you understand the nuances of the various programs and all – the only thing I ask of you is that you pass the word along to your friends and acquaintances. It’s my hope that when questions about Social Security and other financial issues come up, I can help.

Required Minimum Distributions for IRAs and 401(k)s

5 cents

Photo credit: jb

This is one of those subjects that can be a bit confusing – and it’s based on the rules that apply to the different kinds of plans, as well as different kinds of beneficiaries. You are aware that you’re required* to begin taking Required Minimum Distributions (RMDs) once you reach age 70½no wait, 72 – whoops now it’s 73*** – but did you know that specifically which account you take the RMD from has some flexibility? Well – not only flexibility, also some rigidity…

There is a Difference Between IRA and 401(k)

Starting off, we need to understand that, in the IRS’s eyes, there is a big difference between an IRA and a 401(k). For brevity, we’re referring to all sorts of Qualified Retirement Plans, such as 403(b)** or 457 plans, as 401(k) plans. You may consider the two things to be more or less equal, but if you think about it, there are considerable differences between an IRA and a 401(k) – amounts you can fund the account with each year, catch-up arrangements, who can defer funds into each kind of plan, and the list goes on.

A 401(k) plan, being an employer-provided retirement plan, has a completely different set of rules governing it – including provisions that go all the way back to the original ERISA legislation. Among those rules are the rules about RMDs.

On the other hand, the IRA is not covered by ERISA, and as such there are other rules that apply to these arrangements – including the RMDs.

We don’t have nearly enough space here to go over everything that is different between these two types of plans, but we’ll cover the RMD treatment.

Required Minimum Distributions (RMD)

Each and every 401(k) plan* that you own is treated as a separate account in the eyes of the IRS. As such, if you have four old 401(k) plans when you reach age 73, you will have to calculate and take a separate RMD from each 401(k) plan that you have. In other words, you couldn’t aggregate all the plans together and take one RMD from one of the accounts that is large enough to cover all the RMDs. In addition, you have to consider each account separately and figure out how much of each RMD is taxable, if you happen to have post-tax dollars in the account(s).

However, no matter how many IRAs that you have, the IRS looks at all of these plans as one single plan, so you are allowed to pool all of the account balances together, calculate the RMD amount, and then withdraw that amount any single IRA account or any combination of accounts. Your tax basis is aggregated as well (if you have non-deducted contributions in the accounts), so the tax treatment is a consideration for the entire pool of your IRAs in total (rather than account by account as is the case with 401(k) plans).


You have two old 401(k) plans and three IRAs. This is your year, you’ve reached age 73, so you have to start taking RMDs. How do you do it for these five accounts?

Each 401(k) plan’s RMD has to be calculated separately – and a RMD taken directly from each account. But you can pool the IRA account balances together, calculate and take one RMD from one of the accounts that is large enough to cover all three accounts’ minimum distribution. Or from multiple accounts if you wish, as long as the total of your distributions is at least as much as the RMD amount calculated for all of your IRAs.

This is another reason why it can be helpful (from a paperwork standpoint, if nothing else) to rollover your old 401(k) plans into IRAs. By doing this, you don’t have to take a distribution from, in the case of the example above, three different accounts at a minimum.

* Note: if you are still working after age 73 and you’re not a 5% or more owner of the company and your 401(k) plan allows it, you may not be required to take RMDs from the account. This is yet another difference between IRAs and 401(k)s with regard to distributions.
**Also – specifically for 403(b) accounts – you may aggregate all of your 403(b) accounts together for RMD calculation and distribution.
***Lastly, the switcheroo about the age to begin RMDs is the result of the SECURE Act(s) – as of 2023 the RMD age is 73, and will remain so until 2033.

NUA and the Roth Conversion

comte by kthreadYou may or may not be familiar with the concept of Net Unrealized Appreciation (NUA) as it relates to company stock owned in your 401(k) plan. Click the link to get a rundown on it if you’re not familiar with NUA.

Briefly, when you take distribution from your 401(k) you can rollover everything but the company stock (your company) to an IRA, and then put the company stock in a taxable account. By doing this, you pay tax only on the basis of the company stock, and in the future you will only have to pay capital gains tax on the sale of the company stock, rather than ordinary income tax as you would if the company stock (or the proceeds) were in a traditional IRA.

Now, let’s toss in the Roth Conversion concept – you pay tax on the amount that would be otherwise taxable if the distribution were in cash, but you place the funds in a Roth IRA account, and you don’t have to pay tax on it in the future at all (as long as you meet the qualifications).

How do these two concepts work together? Well, at one time, it was thought that you could work both sides of the coin and utilize the loophole: if you converted the company stock directly to the Roth, it seems that you would only have to pay tax on the basis of the stock (per NUA rules), and then never have to pay tax on the capital gains. This is because the stock is held in a Roth IRA.

Not so fast, though. The IRS figured this out pretty quickly after the rules for conversion from a qualified plan to a Roth IRA were put into effect in 2009. For this specific circumstance, you must treat the Roth conversion from a qualified plan as if it were first rolled over to a traditional IRA, and then converted to a Roth IRA. The one exception to the way this is handled is that you only have to consider the qualified plan’s funds that you’re converting – rather than all of your IRAs as you would normally (cream in the coffee rule) – for tax purposes.

At any rate, since you must treat the Roth conversion as if it were originally rolled into a traditional IRA, the NUA treatment option is foregone at that point. So if you tried to do this, you’d end up with a failure, and no NUA treatment would be available to you.

This results in your having to pay ordinary income tax on the entire value of your company stock holdings if you do such a conversion (rather than just the basis). So it may still be to your benefit to enact the NUA rule and put the company stock into a taxable account rather than an IRA – but you’ll have to run the numbers to figure out if this will work best for you.

Photo by kthread

Property Flipping Gains Deemed Ordinary Income, Not Capital Gains

fixer upper by mike t ormsbySince the housing market downturn, the national pastime of “property flipping” has fallen in popularity – heck, I haven’t seen a TV show on property flipping in ages. But the activity of buying a fixer-upper, applying a little sweat equity, and then reselling for a profit has been going on ever since Gog first rehabbed and sold that condo-cave with a view.

If you (or someone you know) are involved in flipping, there have been tax cases that you may want to pay particular attention to. Most of the time, the question of how the sales receipts are classified was addressed, and how the Tax Court responded should be of interest to anyone involved in flipping.

Here’s how one case played out: the taxpayer asserted (among other things), that the activity of buying, rehabbing, and then reselling the properties was an investment activity, and so any gains should be treated as capital gains. The IRS disagreed that this was investment activity, but rather a purchase and re-sell of inventory, and that the income from the activity should be treated as ordinary income.

The Tax Court agreed with the IRS. The nature of the taxpayer’s buying and reselling activity, given that they bought and sold between four and eight properties per year, holding them for two to three months in most cases. According to the Tax Court Memo, the following factors are used to determine whether an asset is a capital investment or if it is an item purchased with the sole intent to resell:

  1. The taxpayer’s purpose in acquiring the property
  2. The purpose for which the property was subsequently held
  3. The taxpayer’s everyday business and the relationship of the income from the property to the total income
  4. The frequency, continuity, and substantiality of sales of property
  5. The extent of developing and improving the property to increase the sales revenue
  6. The extent to which the taxpayer used advertising, promotion or other activities to increase sales
  7. The use of a business office for the sale of property
  8. The character and degree of supervision or control the taxpayer exercised over any representative selling the property
  9. The time and effort the taxpayer habitually devoted to the sales

For the full text of TC Memo 2010-261, click the link. There are bound to be many other cases but this one caught my eye when this article was first written, nearly 13 years ago. As far as I can determine, this treatment still applies today.

Apparently the factor in the above list that caused the greatest damage to the taxpayer’s assertion of investment activity is #4, frequency of sales. In addition, the absence of any intent to lease the properties to generate returns underscores the case that the property was purchased solely to re-sell.

Since the taxpayer in this case purchased and sold fifteen properties within three years and did not attempt to lease or hold the properties for a significant period of time, the Tax Court deemed that the taxpayer’s business activity would be most appropriately classified as “dealers of real estate”. With that classification, the profits derived from sales (above the purchase price and rehab expenses) would be deemed to be ordinary income, subject to self-employment tax and ordinary income tax.

Other factors weighed on this decision, not the least of which was the fact that the profits from sales of properties constituted the primary source of income for the taxpayer during the period.

Understandably, given the much lower tax rate on capital gains versus ordinary income tax rates (not to mention the self-employment tax incurred), it would have been far better for the taxpayer if the profits had been considered capital gains.

As I understand it, in order to be truly successful at property flipping, volume is important. Turning over properties quickly at a profit while putting as little money at risk for as short a period of time possible is the name of the game. This can hardly be described as capital gains oriented activity – at least that’s what the Tax Court says.

Photo by mike t ormsby