Monday, February 15, 2016

Two “After Year End” Payments that can be Treated as Made in 2015

By Les Raatz

Contributions to an IRA – Deadline April 15, 2016. Individuals can make annual contributions to Individual Retirement Accounts as late as April 15, 2016 and still treat them as made for the tax year 2015. Wealthier parents and grandparents might be interested in making those contributions for their descendants as gifts. The amounts are not income tax deductible to the donor, but if the descendant is not a participant in a qualified retirement plan or has modified adjusted gross income of under $61,000 if single, or $98,000 if married, then the contribution to the IRA for the descendant may be fully deductible to her.

Even if a contribution is not deductible, the earnings and increase in value of the IRA after contribution are not taxed until distributed from the IRA. For those who cannot deduct IRA contributions, the contribution may still be made. This may still prove to be an excellent tax savings device. Although there are limitations on the ability of higher income taxpayers to make nondeductible contributions to Roth IRAs, which distributions are generally never subject to income tax, contributions can be made to nondeductible traditional IRAs. Then, after a decent interval of time, the traditional IRA can be converted to a Roth IRA, regardless of the taxable income of the owner. Upon conversion, there will be a one time and generally negligible recognition of taxable income on the increase in value of the traditional IRA over the amount of the nondeductible contributions to it. Thereafter distributions from the Roth IRA are generally income tax free to the owner and those who inherit the IRA from the owner, regardless of the size of the Roth IRA.

The amount that can be contributed to IRA in this manner is limited. First, the contribution for a tax year can in no event exceed the earned income plus taxable alimony of the owner. In any event, the other limitation is that the annual maximum contribution cannot exceed $5,500, plus an additional $1,000 if the owner has attained or is older than 50 in the year for which the contribution is made.

In many states IRAs are exempt from the claims of creditors of the owner, the spouse of the owner, and their estates. In certain states, such as Arizona, creditors of those other than spouses who inherit an IRA from the deceased owner may also be unable to reach IRA accounts, at least while they remain in the IRA.

Trust Income Tax Reduction – Deadline March 5, 2016. Many trusts are distinct taxpayers for income tax purposes (“nongrantor trusts”). If the trustee of such a trust elects, distributions to beneficiaries from a trust made up to 65 days into the next year can be treated as being made in the previous year. This reduces the taxable income of the trust by shifting the taxable income to beneficiaries who may have an income tax rate as low as zero instead of a trust combined federal and state income tax rate of near 50% on taxable income above $12,300. For example, if $20,000 of taxable income was shifted from a trust having $35,000 of taxable income to 2 nondependent beneficiaries with no taxable income, the income tax savings in 2015 would approach $10,000.

If you are interested in further information about these topics, fee free to contact Les Raatz in our Phoenix office at 602-285-5022 or at