Last Minute Tax Benefits for 2014

Better late than not at all.  Congress voted to extend certain tax breaks this past week that include a couple of key taxpayer benefits. They also included a couple of new tax benefits as well.  Here is a sampling:

  • Required Minimum Distributions (RMDs) direct transfers to charity.  When you turn age 70 ½, you must begin taking at least a minimum distribution (RMDs) from your retirement accounts.  These distributions are taxable as ordinary income and the law was implemented so that our government could begin receiving tax revenue.  Many taxpayers prefer not to take the distribution and would be happy to have the money go directly to a charity…meaning that the taxable distribution would be fully offset by the gift to a (deductible) charity.  By extending this provision, you can do just that…have you RMD transferred directly to the qualified charity of your choice.  While you don’t get a deduction on your tax return for the gift, you also don’t have to report the RMD as income on your return.
  • Private Mortgage Insurance (PMI) premium tax deduction.  If, when purchasing (or refinancing) a home, your loan to value is less than 80%, typically you have to pay ‘private mortgage insurance (PMI)’.  The insurance premium is typically rolled up into your monthly mortgage payment.  This tax provision allows you to deduct this insurance premium as long as you itemized on your tax return.
  • New tax benefit for disabled persons.  Congress passed the Achieving a Better Life Experience (ABLE) Act which allows persons who were disabled before age 26 to set up an ABLE account and deposit up to $14,000 per year.  You don’t receive a tax deduction but the money grows tax deferred and distributions are tax free when used to pay for housing, transportation, education and wellness.  These funds do not affect eligibility for federal assistance benefits such as Medicaid or Social Security.

Reader Question:  I look forward to your column each Sunday in the Huntsville times. I am particularly interested in an answer you gave in a recent column related to Required Minimum Distributions (RMDs) for 401(k)s. I understand that a person does not have to take RMDs while they are still working; i.e., until they retire. However, in my research, I cannot find a definition of “working”.  Even the IRS web site uses the term “working” without defining the term. I am looking for the specific IRS interpretation of the term “working”.  For example, I switched from full time to part time a couple of years ago. I currently average 10 to 25 hours a month (a month, not a week). On occasion, I work more hours but still less than 10 a week or 40 per month. I am still an employee?  My employer still contributes 6% of my salary to my 401(k) plan, still maintains my security clearance, and still pays the employer part of my Social Security tax. I do not have an employment contract per se; neither do full time employees. Am I still “working” and not required to take RMDs from my 401(k)?  R.W.

Answer:  This is a good question as a lot of folks continue working on some basis beyond age 70 ½.  April Clouser, a retirement benefits administrator with Benetech Administrators said that you should contact your Human Resources Department for the answer to your question since it’s the plan document that will specify the answer and each plan may be different.

Generally, unless the plan specifies otherwise, you are eligible for the exemption if you are still considered an employee of your company regardless of the number of hours worked.  Based on the facts you’ve presented, my guess is that you will not be required to take an RMD for 2014.  Employees who also own 5% or more of the company are not eligible for the exemption.  April further pointed out that the exemption is also not available if you are a ‘former’ owner of 5% or more of the company or if you’re an owner based on ‘family attribution’…meaning a family member such as spouse owns 5% or more of the company.