Contributions: Monies invested into a Roth IRA.
Original Contribution Date: January 1st of the original (first) Roth IRA contribution year.
Earnings (gains): Capital gains, passive income or dividends earned from a Roth investment.
Over the past few years, Bill’s wife, Julie, contributed $50,000 to her Roth IRA; since inception on 12/4/12, earnings from the investment total $36,000, for a total account balance to-date of $86,000. Bill received the Roth in a divorce settlement and immediately made withdrawals from the account. Note that had Julie not been ordered to give her IRA to Bill, the following guidance would be exactly the same for withdrawals made by Julie.
At any time, Bill can withdraw up to $50,000 (Julie’s total contribution), tax and penalty free. Brokers, by law, are required to report distributions in chronological order as: contribution amount first (always tax and penalty free), earnings second (see below for tax and/or penalty exemptions).
To cover his expenses, Bill needs to immediately withdraw both the original contribution of $50K and the $36,000 earnings that have accrued; again, the first $50K will automatically be reported tax and penalty free. Bill can withdraw the additional $36K earnings tax and penalty free, but only when two hurdles, both “A” and “B” below, are met:
A. The date of his wife’s first Roth contribution was > 5 years from the date of Bill’s first withdrawal of
the $36,000 earnings.
Bill’s wife opened her first Roth on 12/4/2012. Today’s date is 7/17/17. Although less than 5
years since her first Roth contribution, Bill would pass the 5 year rule.
Why? Because the IRS considers a Roth contribution anytime 1/1/12 through 4/15/13, to have originated
on 1/1/12 (retro start date). Therefore the 5 year clock began ticking as of 1/1/12 and the five year
rule was met on 1/1/17. A withdrawal of earnings on 7/17/17 would pass the 5 year rule.
B. Although Bill has passed the crucial 5 year test, one more hurdle must be passed for the $36,000 earnings
distribution to be tax and penalty free.
1. Bill was 59 ½ or older on the date or withdrawal, or
2. Bill is disabled (would need confirmation from the SSA), or
3. Bill uses the earnings for a first time home purchase (restricted to a maximum of $10,000)
• If both “A” and “B” above are satisfied, Bill can withdraw the $36,000 earnings tax and penalty
free. Again, “A” and “B” are not required for exemption of the first $50K withdrawn.
• When the 5 year rule has not been met, TAX would be due on the $36,000 earnings withdrawn, even if Bill
is over the age of 59 1/2.
When the 5 year rule is not met, tax will always be due on withdrawn earnings; however, the 10% early
withdrawal penalty can be waived in certain situations (see below).
Tom opened his first Roth on 9/4/14 when he was 57 years old; therefore, his 5 year clock began 1/1/14 (retro start date). On 5/5/17, Tom’s contribution balance was $15,000, with an earnings balance of $3,000 for a total of $18,000 total Roth balance.
At any time Tom could withdraw up to $15,000 with no penalty or interest being incurred. Although on 5/5/17 Tom is over the age of 59 ½, 5 years has not passed since Tom’s first Roth contribution date of 1/1/14 (retro date); therefore amy amount of Tom’s $3,000 Roth earnings, if withdrawn before 1/1/19, would be subject to tax (at the taxpayer’s tax bracket rate) and the 10% early-withdrawal penalty.
Note: when the 5 year rule has not been met, being disabled would not relieve Tom from owning tax or penalty on his $3,000 Roth earnings.
The 5 year test is the first, and most important, hurdle – without passing this test, and with no exceptions, Tom would owe tax on all amounts withdrawn in excess of his original Roth contribution.
When the 5 year rule is not met, tax will always be due on withdrawn Roth earnings; however, the 10% early withdrawal penalty can be waived under the following circumstances:
• The distributions are part of a series of substantially equal payments (minimum five years or until the
Roth IRA owner reaches age 59½, whichever is longer).
• When used to pay out-of-pocket medical expenses in excess of 7.5% of your Adjusted Gross Income (AGI).
• When used to pay medical insurance premiums after losing your job.
• When used to pay qualified higher education expenses (for yourself or eligible family members).
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.
• The distribution is a qualified disaster recovery assistance distribution.
• The distribution is a qualified recovery assistance distribution.
A 529 plan is an education savings plan that earns tax exempt yields. (i.e. dividends/capital gains). 529 funds earn dividends through investments in relatively conservative (safe) portfolios and most plans allow you to pick from an array of investments from safe (low risk) to more aggressive (higher risk) funds. You can withdraw from a 529 plan at any time to fund trade school or college coursework for your own education, your children’s education (or any designated beneficiary). We do not promote any particular 529 plan; however, there are many from which to choose. Georgia is an excellent 529 state!
529 Plan Facts:
Each year that you withdraw from your 529 plan you will receive a form 1099-Q tax form from the fund provider (broker). You may need this form to complete your personal tax return.
Each year that you wish to withdraw and use 529 funds from your account, you will be required to estimate the maximum 529 withdrawal required to cover all education expenses for that calendar year. If you withdraw an amount beyond what is necessary to cover education cost + room and board, you will be taxed and assessed an additional 10% penalty on a portion of the excess withdrawal…unless you notify your 529 provider and return the excess amount.
Over a 5 year period, you and your spouse contribute a total of $50K into a 529 plan. After five years the total 529 account balance (contributions + gains) = $62,000. At the beginning of the 6th year your child begins college and you project total ANNUAL cost as follows: classes + fees + books + ALLOCABLE ROOM AND BOARD EXPENSE totaling $27,500.
All colleges will provide you with anticipated OFF-CAMPUS room and board expense. This is called ALLOCABLE ROOM AND BOARD EXPENSE. You will use the school’s calculation for ALLOCABLE ROOM AND BOARD EXPENSE, regardless of how much you actually spend for off-campus room and board.
If your child will be living ON CAMPUS, you’d simply include in your total cost the actual room and board cost from the college’s price list for dorm room and meal plans.
1. If your child will not receive scholarships or grants, you can withdraw the entire $27,500 projected annual cost from your 529 plan, tax exempt.
2. If you projected $27,500, but your child’s actual expenses are $24,000 and you did not re-contribute the additional $3,500 back to the 529 plan, you would be subject to tax AND a 10% penalty on the earnings portion of the excess $3,500. The taxable earnings portion of the $3,500 over-withdrawal would be calculated as follows by your tax accountant (or self-prep software) after entering all relevant data from your 1099-Q tax form.
[total 529 plan gains]/[total 529 balance at year end] = [529 average gain %]
$12,000/$62,000 = .1935 (19.35%)
[529 average gain %] x [Total over withdrawal] = [taxable over withdrawal]
.1935 x $3,500 = $677.25 (taxable amount)
In this scenario you’d pay tax (when you file your tax return) at your normal income tax rate + 10% penalty on the $677.25 earnings portion of the $3,500 over-withdrawal. At a typical 33% marginal tax rate + 10%, tax and penalty would be $291.
3. If your projection of $27,500 total annual college expense were correct and you withdrew that amount from your 529 plan, but later discovered that your child received $3,500 in scholarships and grants for the year, you would pay tax on the $677.25 gains portion of the $3,500 over-withdrawal; however, because the over-withdrawal is due to receipt of scholarships and grants, the additional 10% penalty WOULD NOT apply. Therefore, if you child receives a full ride scholarship, you can withdraw all 529 funds without penalty and pay tax only on the 529 account earnings (yields/capital gains). This is exactly how traditional IRAs are taxed at retirement.
American Opportunity Credit (AOC)
Although the gains portion of 529 withdrawals cannot be counted towards the AOC, if your income is between $160,000 – $180,000 (Married Filing Jointly), the contribution portion of your 529 withdrawals + any other out-of-pocket paid towards classes, fees and books, can be used to calculate your AOC.
2016 Personal Tax Checklist
Use the following list to help gather your 2016 tax documents.All items apply to the primary taxpayer and spouse.
If your current CPA or tax preparer is not asking the following questions, they should be doing so.
☐ 1099-MISC (Contractor and Small Business Income Statements)
☐ 1099-R (Retirement Income, Early Distributions and Rollovers)
☐ 1099-INT (Banking Interest Income)
☐ 1099-DIV (Dividend Income)
☐ 1099 Other (Capital Gains, Tax Exempt Bonds)
☐ K-1’s (Partnership and S-Corp Income; Trust Distributions)
☐ Foreign-source income (wages, small business, investments)
☐ Small Business Income & Expenses
(See Small Business Checklists)
☐ Rental Property Income & Expenses
(See Rental Property Checklist)
☐ Held foreign bank accounts (checking, savings, portfolio, trust)
☐ Other Income (Royalties, etc.)
☐ Prunes repulse me, but may one day be my friend
☐ 1095 Proof of Healthcare Coverage
☐ 1098 Mortgage Interest/Tax Statement (Primary, 2nd Home and Rental Properties)
☐ I expect to report one or more child or student dependents on my tax return
☐ I expect to report one or more parents as dependents on my tax return
☐ I expect to report one or more non-family member dependents on my tax return
☐ 1098-T Education Expenses (self, spouse or dependents)
☐ Student Loan Interest (Primary taxpayer or spouse only) – dependent interest cannot be claimed on parent’s tax return.
☐ 1099-Q Withdrawals from education savings plan or E-Bonds
☐ Education Book Expense (self, spouse or dependents)
☐ I paid for Childcare
☐ My employer reimbursed for childcare, or provided childcare facilities
☐ I provided significant financial support for someone other than spouse, child, parents or close family
☐ A dependent earned income in excess of $6,300 in 2016
☐ Charitable Contributions
To claim non-cash contributions in excess of $500, you will need to have documented self-appraised big-ticket items such as appliances, furniture, automobiles, electronics, Jewelry, etc.
You can draft your own charitable contribution appraisal by referencing 3 similar items on Craigslist, Thrift Store or similar retail listing, print pictures of the Craigslist (or take pictures at a Thrift). On the picture or in a log, record the asking price for the Craigslist items.
Take a picture of your donated item, staple pictures of your item and the related Craigslist item together.
Report the most likely value of your item by averaging the selling price for the 3 similar Craigslist items or performing a similar valuation calculation.
☐ I contributed to an IRA separately from my employer’s retirement plan
☐ I received form 1099-SA Healthcare Savings Plan Distributions
☐ I received form 5498-SA Healthcare Savings Plan Contributions
☐ I paid out-of-pocket medical expenses and/or premiums
☐ I love chicken wings and beer, mainly beer
☐ I purchased or exercised stock options (ESOPS, SARs or other)
☐ Educator expenses (teachers/professors only)
☐ I moved due to job relocation
(See Moving Expense Checklist)
☐ I have job search expenses (first time and new career job search expense are not deductible – very strange tax law)
☐ My employer did not reimburse me for all business mileage related to my job or other work-related
expenses such as travel, work gear, specialty work clothing or safety equipment, etc.
Note: commuting mileage is not deductible; additional job-related mileage may be deductible.
☐ I adopted a child in 2016
☐ Children drain your soul, but somehow that is an acceptable loss.
☐ A valuable item that I own was damaged or stolen in 2016 (i.e. home, auto, jewelry, collectible,
business asset, etc.)
☐ I purchased energy-star appliances, windows, doors or insulation for my primary or second home
☐ I own a boat or RV with a kitchen and restroom facility onboard
☐ I hate checklists!
Once we have reviewed your checklist we will discuss all items checked to ensure that all relevant tax documents are available.
By: Troy Bryant, CEO, Doorstep Mobile Tax
Likely Effects of a Higher Minimum Wage:
1. More productive workers will keep their job; poor performers will lose jobs:
Employers mandated with a higher minimum wage will most certainly move quickly to dismiss underperforming employees and assign additional tasks to more motivated workers. Some employers may elect to pay a few hours of overtime to a more select workforce and eliminate other workers; while in companies where a substantial number of minimum wage employees currently enjoy overtime, employers may opt to hire additional workers, eliminate overtime and potentially reduce full-time status for others. Regardless of the method used, aggressive employers will push back against the new wage laws, crunch numbers and adjust as necessary to optimize employee cost. Many minimum wage workers, likely most of them, will suffer the consequences. Since higher minimum wages will most certainly affect a sudden decrease in job openings, those who keep their jobs will be forced to succumb to employers’ stricter demands or face potential job loss.
2. Although thinning out his or her employee base, reducing overtime or other direct employee cost adjustments will help to offset the effect of higher minimum wages, head count adjustments alone will not fully reduce the sting of a higher minimum wage. As a result, technology innovators, from fast food to janitorial, retail and manufacturing suppliers, will aggressively begin to offer new innovations for automating tasks currently performed by minimum wage workers. Currently the threshold for some of these technologies may not be cost effective for a business owner to implement. However, with the proposed wage hike, these new technologies may be more cost effective than paying a much higher minimum wage.
Note: An increase from $7.25/hour to only $12/hour for a 40 hour work week, per employee, plus the increase in employer FICA tax matching would increase an employers WEEKLY per employee cost by approximately $220 (would be slightly higher or lower based on employers’ State). Wow, imagine how much of an immediate negative impact this would have on a business with low gross margins and a significant number of minimum wage employees!
3. Some businesses would likely move from a higher minimum wage state into a lower minimum wage state, or move operations to another country. This would not likely be a viable option for the fast food and other retail industries. However, although the minimum wage argument has focused on “fast food” and “retail” workers, a significant number of minimum wage workers do not work in fast food or retail; therefore, moving operations would likely upset the economies of states adopting higher wages, and provide a boost for states that maintain a lower minimum wage.
4. Skilled and semi-skilled workers currently earning the equivalent of the proposed minimum wage (or wages near to the proposed increased minimum wage) will become disgruntled and demand higher pay, further affecting an employer’s move to offset the sudden new expense by reducing head count and further implementation of new technology to replace workers.
5. Currently, minimum wage workers at $7.25/hour earn about $14,500 per year gross salary ($29,000 for married couples) before deductions for social security and medicare, based on a 40 hour work week and 50 weeks worked per year). Current workers earning at or near this amount receive substantial “earned income” and “child tax credits”, which means that they pay NO income tax; the tax credits often total near $10,000 per couple, per year (and approach $6,000 for single parents). Although these “Credits” are reported on the tax return as a “Refund”, in fact this is free money given by the government to low wage workers. As a direct result of their “low wage” status, these workers are also eligible for food stamps, subsidized housing, SNAP Cash (free $300/mo cash), free healthcare, free or deeply discounted education costs and other benefits. By earning higher wages many will no longer qualify for substantial tax credits and other freebies. As well, many will likely owe a small amount of income tax.
6. Prices for goods and services will increase. Although a substantial minimum wage increase may result in increased consumer prices, it is unlikely that such an increase will be significant, as doing so will be perceived as “to risky” for most business owners – why panic and risk losing customers to competitors who do not increase their prices? Therefore, it is likely that the first move by most business owners will be to cut costs, and not to pass on the added wage expense to their customers.
Conclusion: Initially increasing minimum wage for unskilled workers will have significantly negative consequences for both workers and employers with little impact on consumer prices. However, potential loss of low-wage jobs, tax credits and other incentives for minimum wage workers, may act as a wakeup call for the unskilled work force, hopefully prompting an enrollment boost at vocational schools and colleges.
Should the impact of higher minimum wages reduce the number of available minimum wage job openings, unskilled workers seeking higher-level vocational training or a college degree, over the long term, should have a positive effect on the overall economy… but don’t count on it! Lazy is as lazy does! It is more likely that policy makers will adjust tax credits and other freebies so that, in the end, those who remain employed will enjoy no real increase or decrease in his or her standard of living. Of course, fewer minimum wage workers will most surely be employed.
Likely winners from increased minimum wages: technology innovators (startups), business strategists and the government.
Likely losers from increased minimum wages: many (but not all) low-wage and semi-skilled workers. Regardless, such a change will be a paradigm shift.