February 2006

MEMBERS’ CORNER
BY STANLEY TEPPER, CPA, MBA

Reasons CPA Firms Lose Clients - Per a New York Times Article – Ignoring clients, cutting them off from contact with partners and using a lot of technical jargon during consultations.

Resident Credit – Other Jurisdictions’ Return No Longer Required

The Commissioner of Taxation and Finance has adopted amendments to Part 120 of the personal income tax regulations to eliminate the requirement that a taxpayer submit a copy of the income tax return filed with another political jurisdiction when claiming the resident credit.

Section 620 of the Tax Law provides resident individuals and resident estates and trusts a credit against their New York State personal income tax for any income tax imposed by another state of the United States, a political subdivision of that state, the District of Columbia, or a province of Canada on income both derived from such political jurisdiction and subject to New York State personal income tax. (For more information on the resident credit, see Form IT-112-R-I, Instructions for Form IT-112-R, or Form IT-112-C-I, Instructions for Form IT-112-C, and Publication 99, General Information on New York State and New York City Income Tax Credits.)

The new policy allows a taxpayer to claim the resident credit without submitting a copy of the income tax return filed with the other political jurisdiction that imposed the income tax.

This policy also applies to tax payers claiming the resident credit against the separate tax on lump-sum distributions provided by section 620-A of the Tax Law.

Tax payers must complete and submit Form IT-112-R, New York State Resident Credit, Form IT-112-C, New York State Resident Credit for Taxes Paid to a Province of Canada, or Form IT-112.1, New York State Resident Credit Against Separate Tax on Lump-Sum Distributions, whichever is applicable, with their New York State income tax returns when claiming the credit.

The new policy is effective for tax years beginning on or after January 1, 2005.

Co-op Tax Deductions- A New York Times article stated that accountants have taken the position that while tax laws clearly allow co-op owners to deducts an amount equal to their proportionate share of property taxes paid by the co-op, the laws for computing the minimum tax, they say, just as clearly do not require them to add back such amounts. That is because, they say, these amounts are not property taxes but are maintenance payments.

That was the position taken in the case, entitled Ostrow v. Commissioner of Internal Revenue. In that case, the CPA said the Internal Revenue Service challenged a $10,489 deduction that Lauren Ostrow and her husband, Joseph Teiger, claimed on their 2001 tax return when calculating their alternative minimum taxable income. The amount was the portion of their maintenance charges related to real estate taxes paid by their co-op.

A federal appeals court ruling in November of 2005 prevents co-op owners from deducting the portion of maintenance charges related to the co-op’s property taxes when they calculate their alternative minimum tax.

While the decision puts co-op owners on an equal footing with owners of houses and condominiums for purposes of computing the minimum tax, co-op lawyers say that since many co-op owners took the deduction in previous years, they could be required to pay additional taxes - and interest - if - those returns are audited.

IRA Advisor- Ed Slott, CPA our chapter member publishes a monthly IRA Newsletter. (516) 1-800-633-1340. These paragraphs are excerpted from past articles appearing in his newsletters.

“Custodial Agreements Big and Bad Surprises”

Big and bad surprises can occur when an advisor or investor fails to understand the default provisions that are written into custodial agreements. One of the biggest problems in custodial agreements has to do with per stirpes versus per capita distributions when an IRA owner dies. Most custodial agreements default to a per capita distribution. What’s the difference? Take a look at the following example:

Assume you are a 65 year-old widow, and you have three grown children, each of whom is an equal beneficiary of your IRA. Assume further that each of your children has a child. So, you have three grandchildren, and they are precious in your sight! Let’s assume that your middle child predeceases you, and, for whatever reason, you do not redo your beneficiary designation. When you die, how will your IRA be distributed? The answer is, “It depends.” If the default provision on the beneficiary designation form (or in the IRA custodial agreement) is for a per capita distribution, then your two surviving children will split your IRA 50-50. Your grandchild from your deceased child will get nothing from your IRA! Ouch! However, if the beneficiary designation specifies that the IRA is payable to your three children “in equal amounts, per stirpes,” then your deceased child’s share will automatically pass through your bloodline and your grandchild will receive one third of your IRA.

Alimony – “Who says you don’t earn it? The IRS counts this as compensation for IRA eligibility.”

Divorce- What if one gets a divorce and forgets to remove the former spouse as beneficiary of the IRA. Many custodial agreements are silent. Several say that a divorce or legal separation decree revokes the IRA owner’s previous designation of his/her spouse or former spouse as beneficiary unless the divorce decree or legal separation decree provides otherwise.

An AMEMDED return cannot extend the 60-day roll over rule.

72(t) Basics- One way to escape the 10% penalty on withdrawals from an IRA is to create a schedule of withdrawals that the tax law calls a “series of substantially equal periodic payments,” commonly known as a 72(t) payment schedule, after the section of the Tax Code where the exceptions to the 10% penalty exists.

In Revenue Ruling 2002-62 (October 3, 2002) and before that in IRS Notice 89-25, the IRS identifies three methods that can be used to create a 72(t) payment schedule that will allow payments to be exempt from the 10% penalty even though the payments from the retirement plans were taken before the IRA owner or retirement plan participant had reached the age of 59½. To qualify as exempt form the 10% penalty, the 72(t) payment plan must continue for the longer of 5 years or until you reached age 59½, and the payment calculation cannot be modified during that time (other than the exception to switch to the RMD method under Revenue Ruling 2002-62, which did not apply to this case).

Under two of the methods, the amortization method and the annuity factor method, a reasonable interest rate can be used to increase the amount of the distributions under the 72(t) payment plan. The other method, the required minimum distribution method does not use an interest rate.

Surviving Spouse- Spouse can elect to treat inherited IRA as his/her own IRA, or roll over any inherited plan to his/her own IRA or other eligible plan. This means spouse can defer distributions until he/she is age 70½, then withdraw benefits using Uniform Lifetime Table (which is much more favorable than Single Life Table); and name his/her own designated beneficiary for benefits remaining at his/her death, allowing further deferral.

Trust For Spouse- A trust for spouse, even if it qualifies as a “look-through,” must take benefits over the single life expectancy of the surviving spouse (at best). Trust cannot do a rollover, cannot defer distributions until spouse is 70 1/2, and cannot use Uniform Lifetime Table; and cannot extend deferral over children’s life expectancy after spouse’s death.

Estate- The participant’s estate (or non-look-through trust) does not qualify for “life expectancy of the beneficiary” payout method, is not income tax-exempt, and often is in a higher income tax bracket than family members.

IRA Contributions- Contribute early in the tax year for your IRA contribution. By doing so your money will be sheltered from tax for a longer time. When the market is down, this is the best time to invest. If it develops that you do not qualify in that year for a Roth IRA, a Roth Conversion or a deductible IRA contribution, the IRS has an Administrative Solution called “Recharacterization.” This procedure gives you until October 15th of the year after the IRA contribution year to correct your mistake or change your mind.

IRA Age Limitations-You cannot contribute to a traditional IRA for the year you reach 70 ½ or later years. If you will turn 70 ½ years old in 2006 you cannot make a contribution to your traditional IRA for 2006, you can contribute in 2006 (up to April 15, 2006) to your 2005 IRA, if you otherwise qualify by having compensation. You can continue making contributions to a Roth IRA as long as you have compensation

If you are married, have the eligible compensation and neither you nor your spouse is active in a company retirement plan, then your traditional IRA contribution is fully deductible regardless of your income. There is no income limit if there is no active participation in a company plan. A SIMPLE, SEP, Keogh or other retirement plan for the self-employed business person is considered a company plan for the active participation limitations. If you are active in a plan, then income limitations apply and can reduce deductibility. If one spouse is in a plan, then both spouses are deemed to fall under the active plan limits, but the limits are more favorable for the spouse who is not active in a plan.