Other New Developments For 2015 Part 1

DEFERRED RETIREMENT PLANS LIMITATION

1. 401(K). The maximum contribution is $18,000 but increases to $24,000 if age 50 and older (up to $6,000 in catch­-up contributions).

2. Defined Benefit Plans. The maximum benefit amount is $210,000.

3. Defined contribution plan [e.g 401(k), 403(b)) and 457]. The maximum contribution is the lesser of $53,000 or 100% of compensation.

4. Regular and Roth IRA. The maximum contribution is $5,500 plus a $1,000 catch ­up contribution if age 50 and older. Taxpayer must have earned income.

5. SEP. A contribution up to 20% of net earnings after deductible self-­employment tax subject to an overall limit of $53,000 or $59,000 if age 50 or older. You can add an Roth option that allows free tax contributions to produce tax free income.

6. SIMPLE Plans. The cap remains at $12,500; $15,500 if age 50 and older.

INCOME PHASE OUT

1. Roth IRA. The income level for a self­-employed person who has an optional Roth 401(k) does not apply. The income limit for a Roth IRA is $183,000 to $193,000
for married filing joint, $116,000 to $131,000 for single and head of household, zero to $10,000 for married filing separate.

2 Traditional IRA. You must be under age 701⁄2 at the end of the tax year. You and/or your spouse, if you file a joint return, must have taxable earned income (wages, salaries, commissions, tips, bonuses, or self-­employment). Taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes. Compensation does not include earnings and profits from passive income or any amount received as pension or annuity income, or deferred comp. The MAGI phase­out is $98,000 to $118,000 for married filing joint, $61,000 to $71,000 for single and head of household, $0 to $10,000 for married filing separate, $183,000 to $193,000 for a non­active participant whose spouse is an active participant.

CONTRIBUTIONS DEDUCTION

The deduction limit depends on whether you have a defined benefit or defined contribution plan (profit-­profit­-subject to subject to sharing or money­-purchase plan).

1. SEP Plan. These are treated as a profit-­sharing plan subject to the defined contribution plan limits. To determine the deductible contribution, self­-employment income must be reduced by one-half of the self-­employment tax. A self­-employed person can’t determine the deductible contribution by applying the contribution rate stated in the plan. Instead, the rate must be reduced to reflect the reduction of net earnings by the deductible contribution itself. If the plan rate is a whole number, the percentage is specified in an IRS table for self-­employed. If the plan rate is fraction, the reduced rate is figured using the fractional rate worksheet for self-­employed. The applicable rate is multiplied by net earnings minus one­half of the self-employment tax. The contribution is limited to the annual limit on additions to a defined benefit plan. The annual limit is the lesser of (a) 53,000, or $265.,000 (maximum compensation that can be taken into account) multiplied by the stated plan contribution rate, not the reduced rate.

Example. Harold is self­-employed and has a profit­-sharing plan that provides a 20% contribution rate. No elective deferrals or catch-­up contributions were made to the plan. Self-­employment earnings are $147,000 and the self-employment tax liability is $18,631. The deduction for one-half of the self-­employment tax is $9,316 (1⁄2 x $18,631).Net earnings from self-­employment are $137,684 ($147,000 – $18,631). The tentative contribution limit is $27,357 ($137,684 x .20). The contribution allowed is the lesser of $27,357 or $53,000. Thus, the allowable contribution is $27,357 [J.K. Lasser;s 2016 Your Income Tax]

2. Traditional IRA

(a) Trustees fees. These administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. However, they may be deductible as a miscellaneous itemized deduction

(b) Brokers’ commissions. These are part of your IRA contribution and, as such, are deductible subject to the limits.

( c) Full deduction. If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more of your traditional IRAs of up to the lesser of $5,500 ($6,500 if you are age 50 or older), or 100% of your compensation. This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf.

(d) Non­deductible contributions. If a taxpayer can’t deduct the full amount due to the income phase­out rule, a non­deductible contribution can be made to the extent that the maximum $5,000 contribution ($6,500 for age 50 and older) exceeds the reduced deductible limit.

(e) Penalty for Excess Contributions. If your contribution exceeds the limit for both deductible and nondeductible amounts, you may be subject to a 6% penalty which is cumulative (the penalty is applied to the excess contributions in the following year unless the excess contribution is withdrawn by the due date for filing your tax return).

If no deduction is allowed for the excess contribution, it is not taxable. The withdrawn earnings must be reported as income for the year the excess contribution was made (it is reported on Form 1099R. If you are under age 59 1⁄2, when you receive the income, the10% premature distribution penalty applies unless you are disabled. If the withdrawal of excess contributions applies to an earlier year, an amended return must be filed to correct the excess contribution. However, the 6% penalty still applies for each year that the excess contribution was still in the account at the end of that year [J.K. Lasser;s 2016 Your Income Tax]

(f) Charitable Contributions from a Traditional IRA. For individuals age 70 1⁄2 who are required to take a minimum distribution, the tax law made these restorative to January 1, 2015 and are now permanent. The contribution reduces the qualified minimum distribution included in ordinary income for the year the distribution is made. The contribution limit is $100,000 per taxpayer (not IRA account) for each taxable year. The contribution is not deductible because the distribution used for the contribution is not taxable. The contribution must be made directly to the charity by the plan administrator. If you take the distribution and then make a contribution, the full distribution is taxable as ordinary income and you will the take an itemized deduction for the contribution. The drawback of making the contribution from the distribution is that it is not deductible if you take the standard deduction. Note, For more detailed information on the particulars of IRAs, see IRS Publication 590A, Contributions

To Individual Retirement Arrangements.

3. Roth IRA. No deduction is allowed for contributions to a Roth IRA

TWO YEAR EXTENSION FOR DISCHARGE OF INDEBTEDNESS ON PRINCIPAL RESIDENCE

The new tax law excludes from gross income the cancellation of indebtedness of mortgage debt on a principal residence up to $2 million ($1 million for married filing separate) through 2016. The exclusion is modified to apply to mortgage debt on a principal residence in 2017 if the discharge is made pursuant to a binding written agreement entered into in 2016.

MORTGAGE INSURANCE PREMIUMS

These are treated as deductions for qualified residence mortgage interest on debt incurred to purchase, construct, or improve a first or second residence. The deduction is phased out as AGI ranges from $100,000 to an adjusted AGI exceeding $109,000. Before the new law was passed, the deduction was not available for tax years after 2014. The law extends the deduction for premiums paid or accrued in 2015 and 2016 or accrued in 2015 and 2016 and not properly allocable to any period after 2016.

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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