Tax Archives | Page 6 of 12

Changes to Inherited IRA Rules: New Vs. Old Rules

08 Aug 2021
SDG Accountants
Accounting, Tax
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You can inherit a decedent’s IRAs in the same way that you can inherit their property. If a relative, friend, or spouse died before withdrawing funds from an IRA to which they had contributed for a long time. Many descendants leave their IRAs to their spouses or close relatives, but the family does not have immediate access to the decedent’s IRA. To be allowed to withdraw money from the decedent’s IRA, they must fulfill certain regulations. An inherited IRA is similar to an inherited asset in that you must claim it after meeting certain criteria.

The inherited IRA includes a variety of withdrawal requirements, some of which are based on age and others on time. The Setting Every Community Up for Retirement Enhancement (SECURE) Act recently modified the rules for inherited IRAs. On January 1, 2020, the SECURE Act was entered into effect. Since this was the first major adjustment made after the Tax Cut and Jobs Act of 2017, the US Tax Code has undergone considerable changes. Some taxpayers may benefit greatly from the latest adjustments, while others may find them to be a real burden. It all depends on the circumstances. The SECURE Act significantly alters Required Minimum Distributions (RMDs) and the impact of age on IRA withdrawals.

Old Inherited IRA Rules:

To completely comprehend the SECURE Act’s changes, we must first understand the old inherited IRA rules, which have been in existence for a long time. If you inherited an IRA account prior to 2020 from someone who was taking RMDs, you would be obligated to take RMDs for the first year after inheritance as well, according to the old inherited IRA rules. For example, suppose I’m a 35-year-old woman whose mother died in 2019 at the age of 76 and left me her Traditional IRA. Then I’d have to take the same RMDs as last year and continue with my own beneficiary RMDs the next year, which would be 2020 and beyond. My RMDs were estimated throughout the remainder of my life expectancy in my situation. Stretch IRAs were common because they allowed the beneficiary to better control their annual tax payment.

New Inherited IRA Rules:

Moving on to how the rules changed in 2020, the SECURE Act only made two main changes. The first change is that inherited IRA account owners will no longer be required to take the decedent’s Required Minimum Distributions. The withdrawal of money is also regulated by the SECURE Act. Owners of inherited accounts must now withdraw the whole balance of the inherited account within 10 years. This means that all taxes and inherited account balances must be settled within ten years of the inheritance.

Since the SECURE Act went into force, most beneficiaries have lost access to the Stretch IRA. Depending on whether or not they match the conditions, certain taxpayers may still be able to use the Stretch IRA. If the IRA was inherited by the decedent’s surviving spouse, relatives, or friends who are not more than ten years younger than the decedent, minor children (those under the age of 26), beneficiaries of annuity contracts that have previously made an irreversible income election, and beneficiaries of inherited government-sponsored retirement plan The S will be available to all of the above-mentioned beneficiaries. All of the above beneficiaries will be able to use the Stretch IRA or withdraw funds in accordance with the SECURE Act’s rules.

How to Know Which Rules Apply to Me?

Anything relating to the Internal Revenue Service (IRS) is complicated and difficult to comprehend for the average citizen. You are not to blame because there are so many details and so much confusion. Furthermore, keeping up with new regulatory changes can be time demanding. You have a lot more important things to do than investigate tax and IRS rule changes. You’ll need someone to help you keep track of all the IRA changes and keep you informed.

After a brief analysis, an expert tax adviser, such as a Miami Tax Accountant, can answer any questions you may have concerning the new rules and how they apply to you. Every day, tax advisors deal with individuals like you, and whenever the IRS makes a rule change, they will consult a great number of people in order to guide them in the appropriate direction. Contact your financial advisor immediately to ensure you’re on the right track.

How to Know If I am Exempt from Federal Tax Withholding?

06 Aug 2021
SDG Accountants
Accounting, Tax
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Many Americans worry about whether they are eligible for a federal income tax exemption or if they must pay. Don’t worry, your Miami Tax Accountants, SDG Accountants, can assist you with a team of highly skilled tax advisors! Read this article to learn how to be exempt from federal tax withholding and if you qualify for an exemption.

What is Exempt from Federal Tax Withholding?

When you receive a paycheck from your employer, the business is required by law to deduct taxes and other deductions as directed by the government. One of these deductions is withholding, which is the amount that your employer is required to deduct from your paycheck for federal income tax purposes. You’ll usually notice this on your paystubs as well; there’s a section on your paystub that shows you how much federal income tax was deducted. Always go over your paystubs thoroughly and analyze every deduction you’ve made. Keep in mind that exemption excludes the Federal Insurance Contributions Act (FICA), as well as Medicare and Social Security. You will have to pay those taxes on every paycheck.

Let’s have a look at how refunds work. When tax season arrives, you review your paystubs and financial records to determine how much tax, or “income tax liability,” you owe for the year. Once you’ve determined your amount, compare it to the amount withheld by the government from your pay for the year. You obtain a refund if the amount on your paystubs is larger than the amount you calculated; otherwise, you must pay the remaining debt owed. You will see withheld taxes for state tax purposes on your pay stubs, and your refund will be calculated in the same way.

Both the government and the taxpayer benefit from withholding. For the government, withholding taxes ensures that the taxpayer does not avoid paying taxes and that the tax bill is paid on time each year. For the taxpayer, it decreases the amount of worry they will experience while filing their taxes because withholding lowers their annual tax payment by a certain amount. Individuals may find it difficult to manage and pay all of the money at once.

How does Exempt from Federal Tax Withholding Work?

You must verify a few things in order to be exempt from withholding. When you declare yourself exempt from federal withholding taxes, the government will not deduct any taxes from your paychecks. This isn’t something you can just claim; the IRS requires a few verifications before you may be exempt from federal income taxes. If you owe no federal income taxes the previous year and plan to owe no federal income taxes this year, you can qualify for an exemption.

How to Claim Exempt Status?

The IRS has provided taxpayers with a W-4 form that they can use anytime they change jobs or need to adjust their withholding amount. This form is completed by the employer and instructs them on how much to deduct from each paycheck. You can claim up to three allowances on the W-4 form. Your company will deduct less from your salary if you claim fewer allowances. To file a complete exemption, write exempt in the space below Step 4(c) on the W-4 form. To learn more about the W-4 form and how to file one, contact your Tax Preparer Miami.

Some taxpayers desire to claim exempt status for a limited time and then return to it later. It is possible to do so, and many taxpayers do so throughout the year. When you want to claim exemption, you must once again file a Form W-4. Your tax bill will not be postponed as a result of this; the amount owed will be paid during tax season. Fill out a new Form W-4 to resume withholding federal tax. It’s important to understand whether you’re eligible for withholding so you don’t end up paying fines if something goes wrong.

Filing as Exempt When I am Not Eligible:

Remember that filing an exemption does not reduce your taxes; rather, it causes you to pay your entire tax amount when filing your federal income tax. The IRS can levy fines for failing to withhold federal taxes in particular situations. Contact an experienced tax professional to ensure you fully understand the exemption and whether or not you are eligible.

Traditional Vs. Roth IRAs: Key Differences

05 Aug 2021
SDG Accountants
Accounting, Tax
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Many individuals take retirement for granted; the idea of no longer being useful to the industry in which you worked for years is ridiculous to consider. That emotion is unavoidable. You’re forced to abandon a field that used to be your passion when you were younger. After you retire, you’ll need a source of money to keep you afloat. Even in your 70s, after working your entire life to secure your future, you should not be required to work. Your best option is an automatic source of income, which you can obtain if you begin working for it as soon as you begin your profession. Individual Retirement Accounts (IRAs) are the best option for your financial future. In every manner, it’s correct. Many Americans begin saving in Individual Retirement Accounts (IRAs) as soon as they begin their careers since it is the most advantageous option. Traditional IRAs and Roth IRAs are the two most popular IRAs in the United States.

The Employee Retirement Income Security Act (ERISA) of 1974 established the Traditional IRA. On the other side, Sen. William Roth introduced the Roth IRA 23 years later, in 1997. The sponsors’ name was then added to the IRA. We’ll go through all the important distinctions so you can figure out which IRA is best for you.

Tax Breaks:

Traditional IRAs and Roth IRAs both offer the same tax breaks, but they do not allow individuals to pick when they can claim their payments. Let’s start with the traditional IRA. The traditional IRA reduces your taxable income by collecting tax before making a payment to you. Traditional IRA contributions are taxable on both the state and federal levels for the tax year in which they are made. The money you get when you retire, as well as any withdrawals, are all taxed at your marginal tax rate. All of this lowers your Adjusted Gross Income (AGI), making you eligible for various tax benefits such as the child tax credit.

Moving on to Roth IRAs, they deduct taxes from your contributions at the time of contribution, thus your AGI for that year will not be reduced. This strategy has the advantage of not requiring you to pay any taxes when you withdraw your money in retirement. Because you paid the tax when you made the contributions, your future will be tax-free.

To put it another way, with a traditional IRA, you pay taxes when you withdraw money at retirement, whereas with a Roth IRA, you pay taxes when you make contributions, so your withdrawals are tax-free.

Income Limits:

There are also income limits for both retirement accounts; you will be able to choose your retirement account based on your income. However, this is merely a restriction for one account; anyone with an earned income of any amount can contribute to a traditional IRA. Different tax rates may apply.

Roth IRAs, on the other hand, have income eligibility requirements. In 2020, singles must have a MAGI of less than $139,000, with payments phasing off at $124,000. Married couples must have modified AGIs of less than $206,000 to contribute to a Roth, and contributions begin to phase down at $196,000.

In 2021, singles must have a MAGI of less than $140,000, with contributions phasing off at $125,000. Married couples must have adjusted AGIs of less than $208,000 to contribute to a Roth, and contributions begin to phase out at $198,000.

IRAs Withdrawal Rules:

Another significant distinction between a regular IRA and a Roth IRA is that the contributors’ withdrawal criteria are different. Traditional IRAs require Required Minimum Distributions (RMDs), which are taxable withdrawals of a percentage of your savings that must be taken by the age of 72, even if you don’t need the money. The IRS provides a worksheet on their website to assist contributors in determining their annual RMD. The estimate is based on your age and the amount of money you have.

Roth IRAs, on the other hand, do not force you to take any RMDs and do not even compel you to withdraw your money at any point throughout your life. It is not necessary or essential to take any money out because there is no tax at the time of withdrawal.

There are numerous more important distinctions between traditional and Roth IRAs; to learn more about which account is right for you, call your Miami Tax Accountant now. Excellent guidance at a minimal cost.