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Income Tax Planning

The ABCs of RMDs

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When is your Required Beginning Date (RBD) to take the first RMD?  For traditional IRAs and most retirement plans, the RBD is April 1 of the year after reaching age 73, for those born from 1951 to 1959. Anyone who turned 73 in 2025 must take his first Required Minimum Distribution (RMD) by April 1, 2026.

For those born in 1960 or later, the RBD is April 1 of the year after reaching age 75.   

Who must take an RMD for 2025? For 2025, anyone who owns a traditional IRA, 401(k), 403 (b), or other qualified retirement account must take RMDs if he has reached the applicable RMD age. There is an exception if he is still working and the employer plan allows- see below.

IRAs vs Employer Plans

Traditional IRAs-An account owner must take his RMD by April 1 of the year following the year he reaches his RMD age, regardless of whether he is still working.

Employer plans (401(k) and 403(b))-If the plan allows, and you are still working and not a 5% owner, you can delay RMDs until April 1 of the year after you retire, if that is later than the year you reach RMD status.

Beneficiary of an IRA account? (Rules below apply to IRA owners who passed away after Jan. 1, 2020.)

An individual non-spouse beneficiary who is not an eligible beneficiary must distribute the entire account balance by the 10th calendar year after the account owner’s death.

If the IRA owner reached his required beginning date, the beneficiary must take annual RMDs based generally on his own life expectancy (using the IRS Single Life Expectancy Tables). These RMDs must begin by December 31 of the year after the owner’s death. Although the beneficiary must take annual RMDs, he will need to fully distribute the account within ten years from the owner’s date of death.

If the IRA owner passed away before his RBD, the RMDs are not required. However, the entire account balance must be distributed within ten years from the owner’s date of death.

Who is an eligible designated beneficiary? An eligible designated beneficiary (EDB) is: a surviving spouse, the account owner’s minor child, a disabled or chronically ill individual, or an individual who is not more than ten years younger than the decedent.

Eligible designated beneficiaries do not have to fully distribute the account within ten years.

If the account owner passed away before starting RMDs, EDBs can use their own life expectancy for RMDs.

If the account owner passed away after starting RMDs, the EDBs will take RMDs over the longer of the deceased owner’s life expectancy (had he lived) or his own life expectancy.

Special considerations for certain eligible designated beneficiaries. Surviving spouses may treat inherited IRAs as their own. Minor children follow the EDB rules until reaching the age of majority, at which point the ten-year rule applies.

If an estate is the beneficiary of an IRA, and the account owner reached his RBD, the estate must make distributions based on the remaining life expectancy of the IRA owner (using the IRS Single Life Expectancy Tables). If the IRA owner passed away before his RBD, the assets must be completely distributed within five years of the owner’s passing, but no annual RMD is required.

IRA owner passed away in 2025– If the IRA owner passed away in 2025 prior to taking this year’s RMD, the beneficiary, whether an individual or an estate must distribute the RMD by the end of 2025.

Want to save income taxes on the RMD? – Use a Qualified Charitable Distribution (QCD) in 2025 For IRA owners with charitable intentions, there is a substantial tax benefit by making a QCD. If the owner contributes all or part of his RMD to charity, the portion contributed to charity will not be taxed. QCDs can be made as early as age 70.5, even though minimum distributions are not required until age 73. A QCD may only be made by an original account owner, not by a beneficiary.

What happens if I don’t take the RMD in 2025? If an account owner fails to withdraw an RMD, the amount not withdrawn is taxed at 25%.

Confused? Everyone’s situation is different. Please consult with a tax advisor at Urbach & Avraham, CPAs, to analyze the impact on your personal situation.

One Big Beautiful Bill Act – Tax Provisions for Individuals

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There are indeed some beautiful provisions for individuals in the new tax act.

“Qualified Tips” are Deductible from Income Effective in 2025, taxpayers may deduct tips. Maximum deduction is $25,000. Tips must be received in occupations which appear on the IRS List of Occupations which Receive Tips. The tips must be reported on Form W-2 or 1099. Deduction phased out for taxpayers with Modified Adjusted Gross Income (MAGI) over $150,000.

New Deduction for Overtime Pay Employees may deduct the overtime pay that exceeds their regular rate of pay (the “half” portion of “time and a half”). Overtime must be separately reported on Form W-2 or 1099. Maximum annual deduction is $12,500 ($25,000 for joint filers). Deduction available for itemizing and non-itemizing taxpayers. Effective for 2025. Deduction is phased out for taxpayers with Modified Adjusted Gross Income (MAGI) over $150,000.

Deduction for Seniors Individuals 65 or older may claim an additional $6,000 deduction. Married couples can receive a $12,000 deduction. The deduction is available for itemizing and non-itemizing taxpayers, effective in 2025. Deduction phases out for taxpayers with MAGI between $75,000 -$175,000 ($150,000-$250,000 for joint filers).

Child Tax Credit For 2025, the Child Tax Credit increased from $2,000 per child to $2,200.

Charitable Deduction for Non-Itemizers Charitable deduction for cash gifts up to $1,000 for single filers and $2,000 for joint filers available to non-itemizers. Effective starting 2026.

Interest Deduction for Car Loans Interest paid on a loan for a “qualified” vehicle may be deductible. A qualified vehicle is a new vehicle whose final assembly was in the US. Effective for 2025 for loans originating after Dec. 31, 2024. Maximum deduction is $10,000 and is available for itemizers and non-itemizers. Deduction phases out for taxpayers with AGI over $100,000 ($200,000 for joint filers)

SALT Deduction Increased For 2025, the SALT deduction cap is $40,000. For years 2026 -2029, cap increases 1% a year. Cap phases down if Modified Adjusted Gross Income exceeds $500,000.

529 Plan Expansion The use of 529 plans was expanded effective 2025 and includes curriculum materials, books, test fees, tutoring and educational services for students with disabilities. The K-12 education distribution limit increases from $10,000 to $20,000 per child, starting with distributions made after Jan. 1, 2026.

Please consult with a tax professional at Urbach & Avraham, CPAs to help you analyze the impact of these new provisions on your personal situation.

Year-End Tax Options

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‘Tis the season to review your investments and make some tax beneficial year-end moves. 

Capitalize on Winners 

Your investments are a good starting point for implementing tax-saving strategies. You can benefit from favorable tax rates on long-term capital gains by selling and taking profits on appreciated securities you’ve held longer than one year. Long-term gains are currently taxed at a maximum rate of 15% for most taxpayers and 20% for taxpayers with taxable income of over $492,300 ($553,850 for joint filers) in 2023.

Cut Your Tax Bite With Losers

Investments that have lost value and have consistently underperformed may be perfect sell candidates, particularly if you’re not confident of a turnaround. By selling your losers, you can use your losses to balance out gains on appreciated securities you’ve sold. Capital losses are fully deductible to offset capital gains from any source and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Any losses that you can’t deduct for 2023 can be carried over for deduction in future years, subject to the same limits.

Don’t make taxes your only reason for selling a security. Many factors enter the decision to sell securities, including how the sale of a specific investment would affect your overall portfolio.

Donating Appreciated Securities

Many public charities accept contributions of publicly traded stock or other securities. A donation of highly appreciated securities held more than one year provides a potential tax deduction for the securities’ fair market value while also avoiding the capital gains tax that would be due if the securities were sold.

Need an RMD in 2023?

Your first RMD (required minimum distribution) must be taken by April 1 of the year following the year in which you turn 72 for those who reached age 72 by Dec. 31, 2022. The first RMD for those turning 72 after Dec. 31, 2022 must be taken by April 1 of the year following the year you turn 73. After that, your RMDs must be taken by Dec. 31 of each year.

Want to save Taxes on the RMD? Use a Qualified Charitable Distribution

A qualified charitable distribution (QCD) allows you to donate to qualified charities directly from your individual retirement account (IRA). While there is no tax deduction allowed for the donated assets, they don’t count as income either. What’s more, a QCD can help satisfy your annual required minimum distribution (RMD). To make a QCD you must be at least 70½ years of age. Gifts must be made directly from your traditional or Roth IRA to a public charity. Up to $100,000 may be transferred annually per spouse.

Heir to an inherited IRA? The IRS is providing relief to heirs of inherited IRAs who are subject to the 10-year rule, allowing them to skip required minimum distributions in 2023. However, there are reasons why one should take an RMD in 2023, although not required:

  • If he has high medical expenses, the medical expenses will offset the RMD income eliminating the income tax on the RMD
  •  By taking an RMD in 2023, he will have a smaller balance to distribute in the remaining years of the ten RMD years, avoiding larger RMDs at higher tax rates

Contact your tax advisor at Urbach & Avraham, CPAs to discuss options suitable for you.

You can reverse a 2020 RMD by Aug. 31, 2020

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RMD Background

A required minimum distribution, or RMD, is the amount of money one is required to withdraw from most retirement accounts after he or she attains a certain age. Beginning in 2020 the Secure Act raised that age from 70½ to age 72. Almost all retirement accounts are affected by the RMD rules. The one major exception is Roth IRAs.

RMDs for 2020

The CARES Act suspended most RMD payments for 2020. Any taxpayer with an RMD due in 2020 from an IRA, an inherited IRA, a 401(k) or 403(b) or defined-contribution retirement plan may skip those RMDs this year. Defined benefit plans are not exempt from RMDs for 2020.

Owners of IRAs, 401(k) plans or beneficiaries of inherited IRAs who already received an RMD in 2020 have until August 31, 2020 to rollover or repay the distribution to the retirement plan. This reversal of the 2020 RMD is intended to benefit older Americans who can refrain from taking money out, making it easier for their balances to recover from the 2020 decline in security values.

Who will benefit?

The ability to reverse a 2020 RMD is not expected to help the majority of retirement account owners who rely on the retirement income to live from. This IRS provision will generally only help those who are less reliant on their retirement account funds for their living expenses. Taxpayers in high brackets stand to benefit from saving the steep income tax and keeping funds longer in a tax-deferred account.  Individuals with extremely high medical expenses in 2020, should not consider reversing the 2020 RMD. The steep medical expenses will shelter the RMD from taxes.

Don’t forget the withholding!

One must return the entire amount of the 2020 RMD to your retirement account by August 31, 2020 to qualify as a reversal. Many individuals have income tax withheld from the RMD. The income tax withheld also has to be returned – not just the amount received. The amount withheld will be credited to your 2020 income tax return. This can reduce the amount of your September and December 2020 estimated income tax payments.

Example of withholding from RMD and reversal

Retired Rita withdrew an RMD of $50,000 in Feb 2020. She had $10,000 of federal income tax withheld from her RMD and received $40,000. If Rita would like to reverse the RMD she must return the entire $50,000 to her retirement account by August 31, 2020 even though she received only $40,000. On her 2020 US Income Tax Return (Form 1040) she will receive credit for the $10,000 of income tax withheld. This will enable her to reduce her third and fourth quarter 2020 US estimated income tax payments.

Look before you leap!

Everyone’s tax situation is different. If you feel you can benefit from the 2020 RMD reversal, contact your investment advisor. You should also contact our tax accountants at Urbach & Avraham, CPAs this week to assist you in the decision.

Tax Gifts for Self-Employed

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Tis the Season – Now is the time for business owners to review potential tax saving possibilities. People who are self-employed have many opportunities to cut taxes that regular employees don’t have.

Health Insurance– Self-employed individuals can deduct health-insurance costs above-the-line. That’s better than deducting them on Schedule A, ( Itemized Deductions) where they are limited.

If the spouse of the owner is an employee and the insured person on the medical insurance, then the medical insurance premiums can be deducted directly on Schedule C as a business expense.

Health insurance premiums paid for long-term care insurance may also be deducted (with some limitations) above-the-line for self-employed business owners.

Qualified Business Income (QBI) Deduction– The 2017 tax overhaul added a QBI deduction of 20% of the net income of self-employed people. Depending upon the type of business, the 20% deduction may be limited when taxable income is $160,700 for single filers and $321,400 for married couples filing jointly. Self-employed workers whose incomes will exceed the limits may get below them by making tax-deductible donations to charity before year-end or contributing more to tax-deductible retirement plans.

Self- employed business owners whose taxable incomes are over the limits, may still receive the QBI deduction depending upon the type of business and subject to additional limits. The amount of the tax deduction will vary depending on the specific taxpayer circumstances.

Office in the Home Deduction– Many self-employed individuals operate their businesses from their home. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

More people are taking the now higher standard deduction or their real estate tax deduction is limited as a result of the state and local income tax limitation. By deducting office in the home expenses, one can deduct a portion of the mortgage interest and real estate taxes that otherwise may be not be deductible.

Retirement Plan Contributions- Self-employed individuals can often make larger tax-deductible contributions to retirement plans than employees. The 2019 contribution to a traditional IRA is a maximum of $7,000. The 2019 limits are over $50,000 for SEP IRAs and Solo 401(k)s.

Retirement Plan Deadlines– For 2019, traditional IRAs can be set up and funded until April 15, 2020. The deadline for a SEP-IRA maybe as late as Oct. 15, 2020 if a valid extension is filed. It is important to remember that requesting a filing extension does not provide an extension on paying the taxes that will eventually be due. The Solo 401(k)s have a catch: for 2019, the contribution deadline can be as late as Oct. 15, 2020. However, the plan must be set up by Dec. 31, 2019.

Review Estimated Taxes– Self-employed workers usually owe estimated taxes. There is a penalty for underpayment. For self-employed who also have W-2 wage income earned either by them or their spouses one can avoid quarterly taxes by increasing their withholding on wages. If the wage-earner doesn’t increase his withholdings until late in the year, that is fine- as long as the IRS receives about 90% of the total tax due by year-end.

Everyone’s tax and financial situation is different. Please contact a tax professional at Urbach & Avraham, CPAs about your business tax options.

 

Conducting Business in Multi-States

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Year-end is a good time to review all operations and to ascertain if you are doing business in additional states. No matter where your company is headquartered, there’s a good chance you conduct business across other state borders. How do taxes work in this situation? Learn about multi-state taxes  to ensure that your business is registered with each appropriate secretary of state, and collecting and submitting the proper taxes.

If your business is headquartered in one state, but you sell your products across the border, do you have to pay taxes in the recipients’ state? This answer depends largely on whether you have what is referred to as a “nexus,” meaning an establishment in the recipients’ state. So what is a nexus and what constitutes an establishment?

Any of the following might create a nexus in a given state:

  • A temporary or permanent office
  • A warehouse
  • A storage locker
  • A sales representative based in that state

The rules have a lot of subtleties, however, and each state may have slightly different interpretations of how the rules work, further complicating the issue. Take for example, New Jersey, which does a lot of cross-border business with New York and Pennsylvania. New Jersey says any of the following may create nexus:

  • Selling, leasing, or renting tangible personal property or specified digital products or services
  • Maintaining an office, distribution house, showroom, warehouse, service enterprise (e.g., a restaurant, entertainment center, business center), or other place of business
  • Having employees, independent contractors, agents, or other representatives (including salespersons, consultants, customer representatives, service or repair technicians, instructors, delivery persons, and independent representatives or solicitors acting as agents of the business) working in the state

Of course, regulatory changes and court cases can change this interpretation at any time. Indeed, the New York State Department of Taxation and Finance issues more opinion letters on sales tax issues than on all other state taxes combined. Many states are desperate for additional tax revenues and are very ingenious at identifying out-of-state businesses operating in their jurisdiction.

With 45 states imposing a sales tax, it’s essential you stay in touch with us to ensure that you’re in compliance. Contact one of our tax professionals at Urbach & Avraham, CPAs to review your multi-state tax situation.