Tax Attic for March 28, 2019

The deadline is fast approaching to make a contribution to an Individual Retirement Account (IRA).  The funds must be invested by the due date of tax returns for the year, which this year happens to be April 15, in order to qualify as a 2018 contribution. Note that “invested” may mean more than just giving your investment advisor the check on April 15. That investment advisor usually still has to do something with the check to actually get it invested. He may have to mail it to the trustee or custodian of your account.  Interestingly, the IRS, in Letter Ruling 8536085, has ruled that an official post office cancellation mark is considered as the date the contribution is made even though the funds are not actually received and invested until after the deadline.  Note that metered postage from the office postage machine does not count as an official post office cancellation. Be more safe than sorry and give the advisor some time to make that contribution. It’s also important to note that the tax return can be submitted prior to making the contribution. Just remember the tax return can be extended and filed after April 15 but there is no extension for the IRA contribution.

Let’s discuss the different types of IRAs available; the advantages and the limits of each type. First, there are two very popular types of IRA accounts: a traditional IRA and a Roth IRA.  Both types have the same over-all limits. For 2018, for both types, taxpayers under the age of 50 years old can annually contribute up to $5,500. Taxpayers who have obtained the age of 50 can contribute an additional $1,000 for a total annual contribution of $6,500. Only individuals under the age of 70 ½ at the end of the year can contribute to a Traditional IRA.  This is one of the differences between the Traditional and the Roth IRA. Taxpayers of any age, over 70 ½ or not, can continue to annually contribute to a Roth IRA. In order to make any contribution to either type of IRA, the taxpayer or taxpayer’s spouse must have earned income and the total contribution of both spouses cannot exceed that total earned income. Let me re-state that item. A spouse can make a contribution to an IRA even if the spouse has no earned income as long as the taxpayer’s spouse has enough earned income.  A non-working spouse is dealt with fairly in this instance in the tax code.

One of the advantages and also one of the differences involves the deductibility of the contribution. Traditional IRA contributions may be deductible based on whether the contributor is covered by an employer retirement plan or not.  If he or she is not covered by a plan, the contribution would be deductible. If he or she is covered by a plan, the deduction is phased out depending on the taxpayer’s modified adjusted gross income. However, in the world of Roth IRAs,  the contribution is never deductible.  Being able to contribute to a Roth can be phased-out due to a high amount of income. Based on the potential deductibility advantage, why would a person put money into a Roth IRA and forego a deduction instead of contributing to a Traditional IRA and getting a deduction?  The answer is something similar to what I would say is “delayed gratification “. Traditional IRA contributions are deductible; a form of immediate gratification. The distributions of Traditional IRAs, however, are usually fully taxable. On the flipside, Roth IRA contributions are not immediately deductible but Roth distributions are typically not taxable. By putting off the tax benefit and getting gratification at a later time, the taxpayers don’t pay tax on the distribution.  Roth IRAs, in the right circumstance, are almost without equal as a long term tool to save for retirement. There are other similarities and differences that I will go over in a future article.

Before I wrap up this article, I have to pass on one tidbit to my minister friends.  It concerns the clergy housing exclusion/allowance.  It would take at least one article and maybe two to fully explain the concept of the clergy housing exclusion/allowance but it has been part of our tax law since we have had a tax law. In fact, it is tied all of the way back to the founding of our country when chaplains received room and board as part of their pay. Ordained ministers are allowed to have a portion of their pay set aside as a housing exclusion/allowance.  This deduction has been under attack through the court system off and on for many years now. In a case that started back in 2011, the U.S. District Court for the Western District of Wisconsin ruled the deduction was unconstitutional because it violated the separation of church and state principal.  That decision was subsequently appealed to the 7th Circuit Court of Appeals and on March 15, it rendered a decision. It’s decision states that allowing the housing exclusion/allowance “doesn’t result in excessive government entanglement with religion”.  It ruled that, therefore, the housing exclusion/allowance is constitutional. That should be enough to set aside the controversy over the exclusion for a while.   This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

Action Tax Service is a part of Integrity Tax Group on Northland Dr in Rockford.

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