Taxes

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IRAs and RMDs: Answering Your FAQs
IRAs and RMDs: Answering Your FAQs 1600 941 smolinlupinco

You may be aware of the fact that you can’t let funds sit in your traditional IRA indefinitely. Once you reach age 72, you’re required to start taking withdrawals. 

You may also be aware that the rules for taking required minimum distributions, or RMDs, are complex. Here are some answers to frequently asked questions about taking withdrawals from a traditional IRA (including SIMPLE IRA or SEP IRA). 

Can I withdraw money before retirement?

The simple answer: yes. 

That said, if you want to take money out of a traditional IRA before the age of 59.5, those distributions are taxable and you may be subject to a 10% penalty tax. 

That 10% penalty tax—but not regular income tax—can be avoided if you pay: 

  • Qualified higher education expenses
  • Up to $10,000 of expenses if you’re a first-time homebuyer
  • Health insurance premiums if you’re unemployed 

When can I take my first RMD for an IRA?

You must take your first RMD by April 1 of the year after the year in which you turn 72. Note that this rule applies whether or not you’re still employed. 

How do I determine my RMD? 

When calculating your RMD, take the account balance from the end of the preceding calendar year and divide it by the distribution period from the IRS’s Uniform Lifetime Table. 

If the sole beneficiary is a spouse who is 10 or more years younger than the owner, a separate table will be used. 

What if I have multiple accounts? 

For those with more than one IRA, the RMD for each must be calculated separately each year. 

However, you don’t have to take a separate RMD from each IRA—you may combine the RMD amounts for all IRAs, and either withdraw the total from one IRA or a portion from each. 

Can I withdraw amounts exceeding my RMD? 

Yes—you can always withdraw more than your RMD. Note, however, that you cannot put excess withdrawals toward RMDs in future years. 

When planning for RMDs, weigh your income needs against the ability to maintain the IRA tax shelter for as long as possible. 

Can I withdraw more than once a year? 

Yes. As long as you withdraw the total annual minimum amount by December 31 (or, if it’s your first RMD, April 1), you may withdraw your yearly RMD in any number of distributions throughout the year.

What if I don’t take an RMD? 

If your distributions for any given year are less than your RMD, you’ll be subject to an additional tax. This tax is equal to 50% of the amount that was not paid out but should have been. 

Plan ahead with us

Questions about your retirement planning? Our knowledgeable tax advisors can help. Contact us to learn more. 

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Are Tax-Free Bonds Really Free of Taxes?
Are Tax-Free Bonds Really Free of Taxes? 1600 941 smolinlupinco

While investing in tax-free municipal bonds generally provides tax-free interest, you may still encounter tax consequences. Keep reading to learn more about the potential tax and other financial consequences of investing in tax-free bonds.

Purchasing tax-exempt bonds

There are no immediate tax consequences for purchasing a tax-exempt bond for its face amount, whether on the initial offering or in the market. If you buy a tax-exempt bond between interest payment dates, however, you will owe the seller any accrued interest since the most recent interest payment date. 

The amount of interest accrued is then treated as a capital investment and will be deducted as a return of capital from the following interest payment. 

Is interest included in income?

Generally speaking, interest received on a tax-free municipal bond will not be included in gross income—but it may be used for alternative minimum tax (AMT) purposes. Tax-free interest may be appealing, but it’s important to note that compared to an otherwise equal taxable investment, a municipal bond may pay a lower interest rate. What really matters is the after-tax yield. 

The after-tax yield for a tax-free bond is typically equivalent to the pre-tax yield. Alternatively, the after-tax yield for a taxable bond is determined by your interest amount after accounting for the increase in your tax liability due to annual interest payments—which is based on your effective tax bracket. 

Taxpayers in higher brackets tend to be more interested in tax-free bonds, since excluding interest from income offers a greater benefit. Taxpayers in lower brackets, however, may find that the tax benefit from excluding interest from income may not adequately make up for a lower interest rate.

While not taxable, municipal bond interest still shows on a tax return. This is because tax-exempt interest is taken into account when determining the amount of taxable Social Security benefits (and other tax breaks). 

Tax-exempt bond interest and the NIIT

Another tax advantage of tax-exempt bond interest is that it is exempt from the 3.8% net investment income tax (NIIT). 

This is imposed on the investment incomes of individuals whose adjusted gross income exceeds:

  • $250,000 for joint filers
  • $125,000 for married filing separate filers
  • $200,000 for other taxpayers 

What about retirement accounts?

Because the income in your traditional IRA or 401(k) isn’t currently taxed, it generally isn’t logical to hold municipal bonds in those accounts. Once you start taking distributions, however, the entire amount withdrawn may be taxed. 

For those who want to invest retirement funds in fixed-income obligations, it’s typically a good idea to invest in higher-yielding taxable securities. 

Consult with a tax professional

Before investing in tax-free municipal bonds, it’s important to fully understand the tax implications—and those mentioned above are only some of the tax consequences. If you need assistance understanding and applying tax rules to your situation, contact us to work with a knowledgeable tax advisor.

© 2022

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Why Auditors Prefer to Assess Fraud Risks Face-to-Face
Why Auditors Prefer to Assess Fraud Risks Face-to-Face 1600 941 smolinlupinco

Due to AICPA auditing standards—namely the Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit—financial statement auditors are required to evaluate and assess fraud-related material misstatement risks and determine appropriate responses. 

Keep reading to learn why it’s important to conduct in-person interviews when evaluating fraud-related misstatement risks. 

What to expect in an audit inquiry

A crucial aspect of the audit process is asking fraud-related questions. Specific areas of inquiry include: 

  • Whether management is aware of any fraud—actual, suspected, or alleged 
  • Management’s identification, assessment, and response tactics regarding fraud risks 
  • The results of any fraud risk assessments 
  • Any previously identified fraud risks
  • Transaction, account balance, or disclosure classes likely to contain a fraud risk
  • Any communications regarding fraud risk identification and response processes, including sharing views on appropriate and ethical business practices and behavior with employees  

Each audit requires a separate interview, as fraud risks can vary by accounting period. 

The importance of nonverbal communication

While the pandemic resulted in a number of audit procedures being done remotely, auditors are returning to face-to-face fraud risk interviews for more effective evaluations. 

Psychologists estimate that 55% of communication is body language—meaning that in an in-person interview, auditors can pick up on nonverbal cues they may have otherwise missed in a virtual setting. In addition to the words being spoken, tone and inflection, and the speed of response, auditors can also keep an eye on the interviewee’s physical comportment. 

The auditor will look for signs of stress as the interviewee is answering questions—for example, long pauses before responding, starting over mid-explanation, sweating profusely, or fidgeting. 

An additional benefit of face-to-face interviews is that they allow for immediate follow-up. While in-person meetings are ideal, they aren’t always a viable option. In these cases, video or phone calls are the next best thing.

Work with us

External audits are an important tool for identifying fraud risks. While they’re not guaranteed to detect all unethical behavior, they often deliver results. According to Occupational Fraud 2022, companies who had financial statements audited were able to detect fraud 33% faster—and lost one-third less from fraud—than those who hadn’t.

Our team can help you with the audit process by providing services tailored to your unique needs. By anticipating the type of information we’ll ask for, from questions to source documents, you can help streamline our fraud risk assessment process. When you provide prompt responses, we can ensure that your audit stays right on schedule. Contact us to learn how we can help. 

does-your-income-warrant-extra-taxes

Does Your Income Warrant Extra Taxes?
Does Your Income Warrant Extra Taxes? 1600 941 smolinlupinco

If you’re a high-income taxpayer, you may need to pay two extra taxes: a 3.8% net investment income tax (NIIT), and an additional 0.9% Medicare tax on wage and self-employment income. 

Keep reading to learn more about these taxes and what they might mean for you. 

3.8% NIIT

In addition to income taxes, the NIIT applies to your net investment income. This tax affects taxpayers with adjusted gross income (AGI) exceeding the following: 

  • $250,000 for joint filers
  • $200,000 for single taxpayers and heads of household
  • $125,000 for married individuals filing separately 

If your AGI is above this threshold, the NIIT applies to the lesser of: 

  • Your net investment income for the year, or
  • The excess of your AGI over the threshold amount for the tax year 

What incomes are subject to the NIIT? 

Net investment incomes subject to the NIIT include interest, dividends, annuities, royalties, rents, property sale net gains, and passive business income. This does not include wage income and active trade or business income, or tax-exempt income tax such as bond interest. 

After considering your income needs and investments, you may want to consider switching some of those taxable investments over to tax-exempt bonds. 

How does the NIIT apply to home sales? 

If you sell your primary residence, you may be able to exclude up to $250,000—or $500,000 for joint filers—in your income tax, which will not be subject to the NIIT. If your gain exceeds that amount, however, it will be subject to tax. This also applies to gain from selling a vacation home or other secondary residence. 

Note that distributions from retirement plans such as pension plans and IRAs are not subject to the NIIT. However, if these distributions push your AGI above the threshold, they can cause other income types to be taxed. 

Additional 0.9% Medicare tax

In addition to the 1.45% Medicare tax that applies to all wage earners, some high wage earners are subject to an additional 0.9% Medicare tax. This applies to wages that exceed: 

  • $250,000 for joint filers
  • $125,000 for married individuals filing separately
  • $200,000 for all others 

Note that this tax only applies to employees—not employers. 

The employer must begin withholding the additional 0.9% Medicare tax once their employee’s wages for the year reach $200,000. However, if the employee (or the employee’s spouse) has additional wage income from another job, this may prove insufficient. Instead, the employee may file a new W-4 with the employer to request extra income tax withholding. 

How does the extra Medicare tax affect self-employment income? 

In addition to the regular 2.9% self-employment Medicare tax, the additional 0.9% Medicare tax applies to self-employment income for the tax year that exceeds the same amounts as wage earners—note, however, that the $250,000, $125,000, and $200,000 thresholds are modified according to the self-employed taxpayer’s wage income. 

Work with our tax advisors

Income taxes can be complicated, especially when they vary from year to year. Is your income high enough that you owe these extra taxes? Contact us to discuss your taxes and their implications with a qualified tax professional.

© 2022

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