Tax Attic for 11-1-18

Ever wonder when someone, usually a media person or maybe a politician, says the top 1% of high income taxpayers pay 50% of all taxes and the bottom 50% of all taxpayers pay 1% of all tax, where those figures come from?  Are they real figures or did they just come from the air?  Actually, most of the time, those figures come from analysis compiled by the Internal Revenue Service.  In reality, what agency is better suited to do the statistical income analysis of income reported on tax returns than the IRS?  It just takes computer power and time to analyze the 140+ million individual tax returns filed and come up with accurate filing statistics.  The 2016 filing season figures have now been released.  Regarding my opening statement, the IRS report states that the top 1% of high income taxpayers paid 37.32% of all federal tax while the bottom 50% actually paid 3.02% of all federal tax. So what kind of income does it take to get into that top 1% of high income taxpayers?  $480,804 will turn the trick.  The top 5% had income of $197,651 and paid 58.23% of all tax.  The top 10% had income of $139,713 and paid 69.47% of all tax.  Just a comment on that bottom 50% paying 3.02% of the tax burden.  There is one big reason for that percentage being low.  Mainly, the credits used to reduce tax burden such as the earned income tax credit, the child tax credit, and the educational tax credit all have higher income phase-out levels to ensure that lower income taxpayers who can use the help get a tax reduction. In addition, exemption and itemized deduction amounts in 2016 were phased-out for higher income taxpayers. Each of these would increase the tax percentage for higher income taxpayers and decrease the tax percentage for lower income taxpayers.  It will be interesting to see how the Tax Cuts and Job Act changes affect these statistics in the coming years.

This week let’s continue our discussion of how to treat Inherited Individual Retirement Account (IRA) distributions.  Individual, non-spouse beneficiaries have different rules than estate or trust, non-spousal beneficiaries. The rules are also different for owners who pass away before the age of the 70 ½ as opposed to those owners who are 70 ½ and have began taking Required Minimum Distributions (RMD). For a non-spouse individual who inherits an IRA from an owner who has not reached the age of 70 1/2, the choices are two.

First, the beneficiary has the choice to take all of the money out of the IRA. The money has to be entirely removed from the account by the end of the fifth year following the year of death.  For example, IRA owner, age 69, passes away with one child as her only beneficiary in 2018.  That child has the choice of waiting until the end of 5th year or 2023 to remove all of the funds from the IRA. This might be a good choice if that child was going to retire in 4 years and 2023 might be a more tax favorable year.  In any one of the intervening years, the child could take as much or as little out of the IRA as he/she wanted.  The rule just requires that all funds must be removed by the end of 2023.  Removing all of the funds is the number one choice for non-spouse beneficiaries..

Second, the beneficiary can elect to start taking distributions over the beneficiary’s age at the end of the year following the owner’s death.  IRA owner dies at age 69 in 2018. Child is age 47; will be 48 at the end of  2019; and is the sole beneficiary. The child can take distributions beginning in 2019 using the IRS’ Single Lifetime Expectancy Table for a person age 48.  That expectancy number is 36 years. Child would take 1/36 of the amount in the first year, 2019.  Every year thereafter the factor would be reduced by 1. In 2020 the child would be required to take 1/35th of the amount in the account. In 2021, 1/34th would be withdrawn.

In this non-spouse, individual beneficiary, owner under the age of 70 ½ situation, these are the options available to the beneficiary.  Next week, let’s look at the choices available when the owner has reached age 70 ½ and is already drawing Required Minimum Distributions.  This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at www.actiontaxservice.com.