Tax

Many people find themselves in situations where they need to withdraw money from their retirement plan earlier than planned. Doing so, however, can trigger an additional tax on top of any income tax taxpayers may have to pay. Here are five things taxpayers should know about early withdrawals from retirement plans:

1. Early Withdrawal.

An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59 1/2 years old.

2. Paying Additional Tax.

If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they might have to pay an additional 10 percent tax.

3. Nontaxable Withdrawals.

The additional 10 percent tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan. A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.

4. Exceptions.

There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.

5. Form 5329.

If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return.

Please call if you have any questions about early withdrawals or filing Form 5329.

• By Leon Clinton
• October 19, 2018

If you’re thinking of starting a nonprofit organization, there are a few things you should know before you get started. First, is understanding how nonprofits work under state and federal law. For example, two things you should understand is that state law governs nonprofit status. Nonprofit status is determined by an organization’s articles of incorporation or trust documents while federal law governs tax-exempt status (i.e., exemption from federal income tax). Whether you’re starting a charity, a social organization, or an association here are the steps you need to take before you can apply for tax-exempt status.

1. Determine the type of organization.

Before a charitable organization can apply for tax-exempt status, it must determine whether it is a trust, corporation or association. Here is how each one is generally defined:

• A trust is defined as a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another. It is formed under state law.
• A corporation is formed under state law by the filing of articles of incorporation with the state. The state must generally date-stamp the articles before they are effective.
• An association is a group of persons banded together for a specific purpose. To qualify under section 501(a) of the Code, the association must have a written document, such as articles of association, showing its creation. At least two persons must sign the document, which must be dated. The definition of an association can vary under state law.

2. Gather organization documents.

Each application for exemption – except Form 1023-EZ – must be accompanied by an exact copy of the organization’s organizing document, which is generally one of the following:

• Articles of incorporation for a corporation
• Articles of organization for a limited liability company
• Articles of association or constitution for an association
• Trust agreement or declaration of trust for a trust

Organizations that do not have an organizing document will not qualify for exempt status. If the organization’s name has been legally changed by an amendment to its organizing documents, they should also attach an exact copy of that amendment to the application. State law generally determines whether an organization is properly created and establishes the requirements for organizing documents.

3. Understand state registration requirements

Next, you will need to take a look at your state’s registration requirements for nonprofits. State government websites have useful information for tax-exempt organizations such as tax information, registration requirements for charities, and information for employers.

4. Obtain Employer ID numbers.

Finally, once your organization is legally formed you will need to obtain employer id numbers (EINs) for your new organization. Organizations can apply for an EIN online, by fax, or by mail using Form SS-4, Application for Employer I.D. Number. International applicants may apply by phone.

Third parties can also receive an EIN on a client’s behalf by completing the Third Party Designee section. Don’t forget to have the client sign the form to avoid having to file a Form 2848, Power of Attorney, or Form 8821, Tax Information Authorization.

One final thing to note, is that nearly all organizations are subject to automatic revocation of their tax-exempt status if they fail to file a required return or notice for three consecutive years. Once an organization applies for an EIN, the IRS presumes the organization is legally formed and the clock starts running on this three-year period.

Questions about starting a nonprofit? Help is just a phone call away.

• By Leon Clinton
• October 16, 2018

With health care, housing, food, and transportation costs increasing every year, many retirees on fixed incomes wonder how they can stretch their dollars even further. One solution is to move to another state where income taxes are lower than the one they currently reside in.

But some retirees may be in for a surprise. While federal tax rates are the same in every state, retirees may find that even if they move to a state with no income tax, there may be additional taxes they’re liable for including sales taxes, excise taxes, inheritance and estate taxes, income taxes, intangible taxes, and property taxes.

In addition, states tax different retirement benefits differently. Retirees may have several types of retirements benefits such as pensions, social security, retirement plan distributions (which may or not be taxed by a particular state), and additional income from a job if they continue to work in order to supplement their retirement income.

If you’re thinking about moving to a different state when you retire, here are six things to consider before you make that move.

1. Income Tax Rates

Retirees planning to work part-time in addition to receiving retirement benefits should keep in mind that those earnings may be subject to state tax in certain states, as well as federal income tax if your combined income (individual) is more than $25,000. Combined income is defined as your adjusted gross income + nontaxable interest plus 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you see this scenario in your future, it may be in your best interest to consider a state with low income tax rates (Pennsylvania, Arizona, or New Mexico for instance) or no income tax such as Florida, Nevada, Alaska, Washington state, or Wyoming.

2. Income Tax on Retirement Income

Income tax on pension income varies for each state. Some states do not tax it at all. In other states, a portion of pension income is exempt, and still other states tax pension income in its entirety. Remember, however, that state tax laws, like federal tax laws, are always changing. Call if you have any questions about tax law changes in your state.

3. Tax on Social Security

In 2018, thirteen states tax social security income in addition to taxing social security income at the federal level. Among them are Colorado, Connecticut, Montana, New Mexico, Vermont, and West Virginia.

4. State and Local Property Taxes

Despite a decline in property values, property taxes have not decreased for most homeowners. Some states, however, offer property tax exemptions to retirees who are homeowners and renters. Again, this varies by individual state. Please call if you have any questions about your state or the state you are planning to move to.

5. State and Local Sales Taxes

State and local sales taxes may or may not be a factor in the overall decision about where you decide to retire, but keep in mind that only five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not impose any sales or use tax.

6. Estate Taxes

Estate tax may or may not matter, depending on your estate and whether you care about what happens to your estate after you die. Like other state taxes, estate tax varies depending on which state you reside in. In fourteen states, there is a tax on estates below the federal threshold amount ($11.18 million in 2018). Hawaii uses the same threshold amount as the IRS when figuring federal estate tax, and New York will do so starting in 2019. Many states have no estate tax whatsoever including North Carolina, Delaware (repealed in 2018), Kansas, Oklahoma, and Arizona.

The bottom line

When it comes to retirees, relocating, and taxes there are a number of factors to consider– including the overall tax burden. And, as you’ve read here, not all states are created equal. If you’re thinking about retiring to another state, please contact the office and make an appointment with a tax professional who will help you figure out which state fits your particular circumstances.

• By Leon Clinton
• October 14, 2018