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New Way to Split Your IRA

An owner of a large IRA with multiple beneficiaries usually receives distributions over his or her life and the life expectancy of the oldest beneficiary using the term-certain method. When the owner dies, payments continue over the remaining portion of the original term.

Instead, however, the owner could divide the IRA into a number of separate IRAs via master-to-trustee transfers and name a different beneficiary for each. The payments could be extended over a longer period for the younger beneficiaries. (For more planning tips, see “How to Maximize IRA Accumulations,” page 32.)

Now there’s another option involving less paperwork and less money. In letter ruling 200036047, the IRS allowed a taxpayer to divide his IRA into nine subaccounts, each with its own beneficiary. He then elected to receive distributions over his and each sub-IRA’s beneficiary’s joint life expectancy. Upon his death, payments can be stretched out over the remaining life expectancy of the taxpayer and the life of each of the beneficiaries.

You Can Have More Than One IRA Payment Series

Generally, if an IRA owner receives distributions before age 59 12 , they are subject to a 10% excise tax under IRC section 720(1). However, this penalty can be avoided if the owner receives a series of substantially equal periodic payments. But, if the owner modifies the series before the later of (1) the close of the five-year period beginning with the date of the first payment or (2) his or her reaching age 5912, the penalty is invoked, plus interest for the deferred period.

In letter ruling 20033048, a 51-year-old IRA owner had been receiving a series of substantially equal periodic payments since 1995. In 2000 the taxpayer wants to receive a lump sum payment equal to seven and a half times the normal annual distribution. Then, in 2001, the taxpayer wants to begin a second series of monthly distributions.

According to the IRS, since the lump sum payment substantially modifies the first series, the lump sum and all prior distributions in that series will be subject to the 10% tax on premature distributions in the year 2000.

However, the service stated that nothing in the code limits a taxpayer to one series of payments. So, as long as the second series begins in calendar year 2001 or thereafter, it will not be subject to the 10% tax.

Ignore What the Form Says

In the past taxpayers whose only capital gains were distributions from a mutual fund that were subject to the 20% maximum tax rate were prohibited from using form 1040A. Starting in the year 2000, these taxpayers can now report such gains on form 1040 A, line 10.

But there’s a problem. Copy B (the taxpayer’s copy) of form 1099-DIV for the year 2000 still states that taxpayers who report capital gains in box 2a of this form must file the long form 1040.

According to the service, taxpayers can ignore this instruction and use the short form 1040A.

The Right Way to Disclose a Gift

In revenue procedure 2000-34 (2000-34 IRB 186) the IRS outlined procedures donors must follow if they fail to adequately disclose gifts on their gift tax returns. If the donor does not adequately disclose the gift, the statute of limitations doesn’t begin to run and the gift can be revalued when computing future gift or estate taxes.

To start the statute of limitations running, the donor must file an amended gift tax return (form 709) with the same service center where the original return was filed. The top of the first page must say “ Amended Form 709 for gift(s) made in (year) in accordance with Revenue Procedure 2000-34.”

Regulations section 301.6501 (c)-1(f)(2) sets forth what information must be in each gift tax return to ensure adequate disclosure.

IRS May Have First Dibs on Your Pension

Can the IRS get at your pension before you do? According to the service, the answer is yes. In legal memorandum no. 200032004, a delinquent taxpayer had reached his company’s normal retirement age of 65 but elected not to retire. According to the company’s plan, upon retirement the employee could elect to receive either a lump sum payment or a joint-and-survivor annuity.

As part of its collection efforts, the IRS levied the taxpayer’s assets in the plan under IRC section 6331, but the plan administrator refused to honor the levy. The service concluded that it could levy against the plan but must wait to collect until the taxpayer has an immediate right to receive benefits. Currently, the taxpayer has only a “present right to a future benefit.” The levy was sufficient to reach the right to the benefits. However, the plan administrator isn’t required to honor the levy until the taxpayer retires and becomes entitled to receive the benefits.

In addition, the service commented that since the taxpayer has the right to elect a lump sum payment, the IRS might elect that option on his behalf (assuming the spouse gave her consent).

—Michael Lynch, Esq., professor of tax accounting at
Bryant College, Smithfield, Rhode Island.


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These year-end tax planning strategies address recent tax law changes enacted to help taxpayers deal with the pandemic, such as tax credits for sick leave and family leave and new rules for retirement plan distributions, as well as techniques for putting your clients in the best possible tax position.


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