IRA's and Investments
IRA and Plans
A 10% fine hits most pre-age-59½ payouts from IRAs, 401(k)s and the like. Taking substantially equal periodic payments is an exception to the penalty. Distributions must continue for the longer of five years or until the recipient hits 59½. Withdrawals must be based on the owner’s life expectancy or the joint life expectancy of the owner and named beneficiary. If the payouts vary too much from year to year, all previous distributions taken from the account will be hit with the 10% levy. There are three ways to compute withdrawals and avoid the penalty: Required minimum distribution method. Divide your account balance by the number of years taken from the Revenue Service’s life expectancy tables. The fixed amortization method. This is similar to a mortgage. You determine your annual payment by amortizing the account balance over a specific number of years, using the life expectancy tables and interest rates. The fixed annuitization method. Divide your account balance by an annuity factor and interest rate. IRS Notice 2022-6 has all the details. Losses in poorly performing Roth IRAs aren’t deductible by account owners because the investments are owned by the Roth and not the holder of the account. Some Roth owners used to be able to claim losses after cashing in all Roths, including closing all Roths in which they had gains as well as those with losses. Prior to 2018, if the total recovered was less than your tax basis in the accounts… essentially your post-tax payins…then the loss was treated for federal tax purposes as a miscellaneous itemized deduction to the extent of the 2%-of-AGI threshold. But that break went away after 2017, when tax reform axed the deduction through 2025 for all miscellaneous write-offs subject to the 2%-of-AGI offset.
Investments
Thinking about investing in REITs or publicly traded partnerships? You could get a nice tax break. The 20% qualified business income deduction for pass-through income also applies to individual holders of PTP units and interests in real estate investment trusts. Individuals can deduct on their federal tax return 20% of their qualified REIT dividends…distributions not taxed under the favorable rules for capital gains and dividends…and 20% of their share of a PTP’s qualified income. REIT unit holders will use the number in box 5 of the Form 1099-DIV for this purpose. Note this capital gains tax break for investing in small regular corporations. Individuals who buy stock in a C corporation with assets of $50 million or less directly from the company after Sept. 27, 2010, and sell more than five years later can exclude 100% of their gain when they sell. The gain is exempt from the AMT, too.
The exclusion is capped at the greater of 10 times share basis or $10 million. Stock of companies in certain lines of business is not eligible. These include banking, brokerage, insurance, oil and gas, and personal services, such as law and consulting. A bid by Democratic lawmakers to narrow this break has lost steam. Their Build Back Better plan proposed to do away with the 100% gain exclusion for people with AGIs over $400,000. Instead, only 50% of their gain would be excluded, with the remaining profit subject to capital gains tax plus the 3.8% surtax.
Build Back Better has been torpedoed by infighting among Democratic lawmakers. Democratic leaders want to salvage some of BBB, but it’s unclear what can survive. A stock sale in a leasing services corporation doesn’t get 100% gain exclusion. A C corp operates a website to facilitate the leasing of real property. Potential lessees make nonbinding reservations for the rental of facilities from lessors at specified rates. The lessor and lessee then enter into a binding agreement. Most of the firm’s revenue is derived from flat-rate fees charged to lessors, but it also gets commissions. The firm provides brokerage services, IRS attorneys say in a private ruling, rejecting the corporation’s claim that it instead offers advertising services. Individuals who sell stock in the corporation don’t qualify for 100% gain exclusion.