How to Figure the Amount to Tap IRA Account
Q: I am age 70 1/2 and know that I am required to begin mandatory withdrawals from my individual retirement accounts. However, I have heard nothing from the banks where my accounts are kept about how much I must withdraw. Is it my responsibility to figure this out, or is the bank required to inform me? --S.A.
A: Technically speaking, it is strictly your responsibility to make the proper withdrawals within the proper time limits. Specifically, the law requires that you make the first withdrawal by April 1 of the year following the one in which you turn age 70 1/2. Taxes are due by April 15 of the year following that in which the withdrawal is made.
Calculating the proper minimum withdrawal can be a bit tricky. The calculation requires that you divide the balance of each IRA account at the end of the calendar year before you turn age 70 1/2 by both your life expectancy and the life expectancy of your account’s primary beneficiary, if there is one. You should be able to get help making these calculations from your bank. The formula is also fully detailed in IRS publication No. 590, which is available by calling (800) 829-1040.
Finally, you should know that once you determine the total withdrawal you must make for the year, you have a free choice as to how to take that distribution. You may decide to tap into only one of your accounts, presumably the one paying the lower rate of interest. Or you may make smaller withdrawals from each account.
Deducting Expenses Could Prove Costly
Q: I am an outside sales agent for a travel agency. I work strictly on commission, but I do go into the office three or four times a week to use the phones and computer. My employer withholds taxes and Social Security from by commission check and gives me a W-2 form at the end of the year. Yet, I have a lot of unreimbursed expenses for phone calls from my home, mileage, entertainment and research. In a previous job like this, I received a 1099 form detailing my commission earnings, and I could fill out my own business expenses for my tax filing. May I still do this, or does the fact that I receive a W-2 form negate this opportunity? --E. R. R.
A: You have raised a complicated and thorny question that you may want to take directly to a qualified tax specialist for a more personal response. However, let’s explain the general law regarding jobs such as the one you hold.
The kind of income reporting statement you receive--W-2 or 1099--is only the manifestation of whether your travel agency regards you as a direct employee or an independent contractor.
Clearly, your present agency views you as an employee. It withholds taxes from your commission checks; it allows you a regular place to work in the office. Your previous employer viewed you as an independent contractor, a self-employed person who was responsible for paying his own Social Security taxes (both the employer and employee’s share) as well as estimated quarterly income taxes.
There are trade-offs involved no matter how you are treated. As an employee, your employer pays half your Social Security benefits, and possibly other benefits as well. The downside is that you have business expenses that are not reimbursed, and you find it difficult to deduct them on your income tax filing because these expenses must exceed 2% of your adjusted gross income before becoming deductible.
Gaining independent contractor status in the eyes of your travel agency and the Internal Revenue Service will likely require that you give up access to any office facilities provided by the agency as well as any employment benefits. You may be losing more than what you would gain from being able to deduct your miscellaneous business expenses.
Home Equity Loan Completely Tax Free
Q: I am thinking of getting a home equity loan on my house, which is fully paid for. Would this money be treated as ordinary income and subject to taxation? --F. B.
A: Absolutely not; the loan proceeds are all yours--tax free. In fact, the interest that you pay on a home equity loan of up to $100,000 is tax deductible. And, if the purpose of home equity loan is to “substantially rehabilitate” your home, you may deduct the interest on a loan of up to $1 million.
Put Policy in Name of Your Children
Q: After my husband’s death, a $200,000 life insurance policy on my life was purchased to cover the estate taxes our children can expect to pay on my estate. This estate includes two pieces of property that have decreased in value since my husband died. If by the time I die they are still depressed, will the children have to value them as of their father’s death? --A. T. R.
A: No. The property will be valued as of your date of death, whatever the amount, because you are the surviving owner of the real estate.
Our legal experts want to raise another important issue about your situation. In whose name was the insurance policy on your life issued? If the policy was issued to you, then the $200,000 proceeds will be included in your estate--essentially negating the effect you are trying to achieve. The policy, says West Los Angeles business attorney Paul Gordon Hoffman, should be issued in the name of your children or a irrevocable trust on their behalf to accomplish what you want: having ready cash available to cover the taxes on your estate.
