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12  THE COURIER SUN  •  FEBRUARY 16, 2017 FOR BREAKING NEWS VISIT www.qns.com Tax tips How to deal with a traditional IRA BY JOHN SAVIGNANO Workers under age 70 1/2 can deduct contributions to a traditional IRA, as long as they are not covered by an employer's retirement plan. The same is true for those workers' spouses. If these taxpayers are covered by an employer plan, they may or may not be able to deduct IRA contributions, depending on the taxpayer's income. However, all eligible workers and spouses can make nondeductible contributions to a traditional IRA, regardless of income. Inside a traditional IRA, any investment earnings will be untaxed. Problems can arise for people who hold nondeductible dollars in their IRAs when they take distributions. Unless they're careful, they may pay tax twice on the same dollars. Example 1: Marge Barnes has $100,000 in her traditional IRA on Feb. 15, 2017. Over the years, she has made deductible and nondeductible contributions. Assume that $25,000 came from nondeductible contributions, $45,000 came from deductible contributions, and $30,000 came from investment earnings inside Marge's IRA. Now Marge wants to take a $20,000 distribution; indeed, Marge's IRA custodian may report a $20,000 distribution to the IRS. However, Marge would be making a mistake, resulting in a tax overpayment. To the IRS, a taxpayer's IRA money must be stirred together to include pre-tax and after-tax dollars. Any distribution is considered to be proportionate. If Marge were to pay tax on a full $20,000 distribution, she would effectively be paying tax twice on the after-tax dollars included in this distribution. Example 2: After hearing about this rule, Marge calculates that her $25,000 of after-tax money (her nondeductible contributions) was 25% of her $100,000 IRA on the date of the distribution. Thus, 25% of the $20,000 represented after-tax dollars, so Marge reports the $15,000 remainder of the distribution as a taxable withdrawal of pre-tax dollars. Again this would be incorrect. Tax rules require an IRA's after-tax contributions to be compared with the year-end IRA balance, plus distributions during the year, to calculate the ratio of pre-tax and after-tax dollars involved in a distribution. Example 3: Assume that Marge's IRA holds $90,000 on Dec. 31, 2017. Her $100,000 IRA was reduced by the $20,000 distribution in February, but increased by subsequent contributions and investment earnings. Therefore, Marge's IRA balance for this calculation is $110,000 (the $90,000 at year-end plus the $20,000 distribution). This assumes no other distributions in 2017. Accordingly, Marge divides her $110,000 IRA balance into the $25,000 of after-tax money used in this example. The result — 22.7% — is the portion of her distribution representing after-tax dollars. Of Marge's $20,000 distribution, $4,540 (22.7%) is a tax-free return or after-tax dollars, and the balance ($15,460) is reported as taxable income. Marge reduces the after-tax dollars, and the balance ($15,460) is reported as taxable income. Marge reduces the after-tax dollars in her IRA by that $4,540, from $25,000 to $20,460, so the tax on future IRA distributions can be computed. The best way to deal with this issue is to track pre-tax and after tax IRA money by filing IRS Form 8606 with your federal income tax return each year that your IRA holds after-tax dollars. John Savignano is a partner with Savignano Accountants & Advisors located at 47-46 Vernon Blvd., Second Floor, in Long Island City. For questions, dial 718-707-0955. Call Now & End Your Tax Nightmare! • Owe the IRS more than $10,000? • Being Audited? • Unfi led Tax Returns? • Wage & Bank Levies? Co-Author of the best selling book “Breaking the Tax Code” (T) 877-TAX-1040 (F) 718-894-4476 Salvatore P. Candela, EA, ATA, ABA Enrolled Agent - Tax Advisor scandela@thetaxadvocategroup.com www.thetaxadvocategroup.com WINTER SAVINGS 10% OFF ANY PURCHASE With Coupon. Not combinable – New Orders Only. Limit 1 per customer. $150.00 max for discount. Excludes Repairs, Refi nishing, Rewiring. Exp. 2/28/17


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