Selected 2018 Inflation-Indexed Figures

Many contribution and deduction amounts in the tax law are indexed for inflation.  Many also have statutory adjustments.  While there remains uncertainty about whether Congress and the President will enact “Tax Reform” before the end of 2017, some important 2018 inflation-adjusted figures have been released and are as follows:

1.        The top 39.6% ordinary income and 20% long-term capital gain tax rates apply when taxable income exceeds $480,050 for joint filers (up from $470,700 in 2017) and $426,700 for single filers (up from $418,400 in 2017).  For trusts and estates, the top rates apply when taxable income exceeds $12,700 (up from $12,500 in 2017).

2.         Itemized deductions and personal exemptions begin to “phase-out” once adjusted gross income exceeds $320,000 for joint filers (up from $313,800 in 2017) and $266,700 for single filers (up from $261,500 in 2017).  These phase-outs do not apply to trusts and estates.

3.        The personal exemption is $4,150 (up from $4,050 in 2017).

4.        The contribution amount for traditional and Roth IRAs remains $5,500 (the same as in 2017).  For those who are age 50 and older, the additional “catch-up” contribution is $1,000 and is not indexed for inflation.

5.        The modified adjusted gross income phase-out range for contributions to Roth IRAs is from $189,000 to $199,000 for joint filers (up from $186,000 to $196,000 in 2017); and from $120,000 to $135,000 for single filers (up from $118,000 to $133,000 in 2017).

6.        The contribution amount for traditional and Roth 401(k) accounts increases to $18,500 (up from $18,000 in 2017).  For those who are age 50 and older, the additional “catch-up” contribution remains $6,000 (the same as in 2017).

7.        The limit on the annual additions to a participant's defined contribution account increases to $55,000 (up from $54,000 in 2017).

8.        The annual exclusion from gift tax increases to $15,000 per donee (up from $14,000 in 2017).

9.        The lifetime exemption from estate, gift, and generation-skipping transfer taxes increases to $5,600,000 (up from $5,490,000 in 2017).

10.    The Social Security tax wage base increases to $128,700 (up from $127,200 in 2017).

11.    The maximum annual contribution to a health savings account increases to $3,450 (up from $3,400 in 2017) for an individual-coverage-only health plan, and $6,900 (up from $6,750 in 2017) for a family-coverage health plan.  For employees age 55 and older, the additional HSA "catch-up" contribution is $1,000 and is not indexed for inflation.

Actions to Consider in Response to the Equifax Data Breach

There are three major credit reporting agencies:  Equifax, Experian, and TransUnion.  According to the Wall Street Journal, there is also a smaller, fourth agency called Innovis.  These companies collect our personal and financial data.  The Equifax website states that it “organizes, assimilates and analyzes data on more than 820 million consumers and more than 91 million businesses worldwide, and its database includes employee data contributed from more than 7,100 employers.”  Whenever we consumers apply for credit, purchase insurance, apply for a job, rent an apartment, purchase the latest cell phone on contract, etc., the businesses we patronize will query the databases of the credit reporting agencies to check our credit scores and history before deciding to do business with us.  The data these agencies collect are precisely the high-quality data that identity thieves crave to wreak havoc in our personal and financial lives.  It therefore came as a shock when we learned a couple weeks ago that the Equifax database was breached by hackers this summer, particularly when it was revealed that there was a software security patch published in March that would have plugged the security hole in the company’s system.  Reportedly the data exposed includes names, Social Security numbers, birth dates, addresses, and driver licenses as well as some credit card numbers and other unidentified data.

So now what do we do?  There have been many articles written in the press about steps you can take to try and protect your online financial accounts and your personal identity.  Based upon my review, here are some steps (not exhaustive) you should consider:

1.      First, go to www.equifaxsecurity2017.com and click the Potential Impact button.  That will link you to a page where you can enter some basic information and find out if your personal information has been exposed.

2.      If your data was exposed, you can enroll in a free year of identity theft protection and credit file monitoring from Equifax in a product called TrustedID Premier.

3.      Go to your online financial accounts and change the challenge questions that you must answer.  Challenge questions appear if you try to log in to your account from a computer that hasn’t been verified with the institution (via a “cookie” on your computer).  Many of these challenge questions can be answered or inferred from the very information that was stolen.  Therefore, it is better to choose more difficult questions that can’t be answered from your now exposed information.

4.      Go to your online financial accounts and sign up for email and text alerts every time there is a transaction, or a change to your username or password, access from a different computer or device, or a change to any other personal account information.  This will allow you to more closely monitor your accounts for fraudulent activity.  But don’t click on any email links as it could be an imposter email.  Instead, login to your online account to review the activity.

5.      Go to your online financial accounts and enroll in two-factor authentication if it isn’t already enabled.  Two-factor authentication requires the entry of a temporary code that is sent by text to your cell phone if there is a log-in attempt from a computer that is unknown to the institution’s website.  Typically you will have accessed your online accounts from your home and work computers and those computers will have been registered with the websites.  The two factors are entering information you know (username and password) and entering a code from something in your personal possession (cell phone).  Since the identity thieves won’t have your cell phone, you have a strong layer of added protection.  Microsoft and Google also have two factor applications which you can use for your different accounts.

6.      If you are not using strong passwords unique to each financial account, you should do so.  Weak passwords are oftentimes based upon personally identifiable information.  To be able to keep track of strong, unique passwords, you need to use a password manager such as LastPass or 1Password among others.  In addition, you may wish to change and strengthen your account usernames which often are just your name or email address.

7.      Set up fraud alerts with the three credit reporting agencies.  You will be alerted if someone applies for credit in your name.  But an alert comes after the fact and is not preventative.  Fraud alerts typically last 90 days and must be renewed for continued coverage.  An extended alert of 7 years requires proof of identity theft.

8.      A more effective action is to freeze your credit history with each of the credit agencies.  The press is reporting that the credit reporting agencies are trying to persuade people to not freeze their credit (maybe because they will lose revenue?).  They emphasize the hassle that you will endure.  If you push ahead, then they try and get you to “lock” instead of “freeze.”  Evidently there is a meaningful difference between the two.  You will need to evaluate the difference to see what is best for you.  Those who have frozen their credit describe the process of temporarily unfreezing as necessary as not being that difficult.  There is typically a small charge for placing the freeze and for temporarily lifting the freeze.  Be sure to consider the freeze for your spouse and children.  Note that a credit freeze does not protect against unauthorized access to your online accounts.

9.      Be careful of suspicious emails or telephone calls purporting to come from Equifax or other companies, or even the police.  If these communications ask you to click on a link, to provide personal information, or to make a payment, it is very likely these contacts will be from scammers.

10. Carefully review monthly statements from your credit card companies, banks, or other financial institutions.  Contact the institution if you see something suspicious, even if it is for a very small amount of money.

11. Check your credit reports often.  You are entitled to a free report once every 12 months from each of the three major credit agencies.  Select one agency every four months.  Use the federally authorized www.annualcreditreport.com website and avoid similarly named websites that try and trick you into a membership or into paying a fee if you don’t cancel within a certain number of days.

12. Keep your computer operating system and antivirus software patched and up-to-date.  Manually click the update buttons every couple of weeks instead of relying completely on automatic updates.  Sometimes there are large updates that aren’t automatically installed.  Do a deep antivirus scan of your computer and attached hard drives every couple of weeks.  Be sure to routinely back up your critical computer data.

13. Get more information at the Identity Theft Resource Center.

14. Implementing these suggestions is time consuming.  However, we must consider that our personal identifying information is now readily available to bad actors.  Therefore, acting sooner rather than later is important in preventing problems in the future.

The Long-Term Care Insurance Decision

Medical advances have lengthened life expectancy, but as we live longer we will have physical and mental incapacities that will require assistance with activities of daily living (ADL).  The six basic ADLs are:  eating, bathing, dressing, toileting, transferring (walking) and continence.  Statistics show that nearly 7-in-10 people who reach age 65 will need some form of assistance with ADLs.  Alzheimer’s and other forms of dementia are the number one cause for claims in nursing homes.

Long-term care costs are expensive, and there are a variety of ways in which people may receive assistance.  A private room in a nursing home had a median annual cost of $91,250 in 2015; an assisted living facility had a median annual cost of $43,200 in 2015; and home health aid services had a median annual cost of $45,760 in 2015.  The average length of stay in a nursing home is three years.  A longer stay can really increase the costs to the family.

Many people in their late 40’s and 50’s have seen their own family members struggle with long-term care decisions including how to pay for such care.  It is important to note that health insurance coverage, including Medicare (which is Federal government health insurance for those age 65 and above), do not cover the costs of long-term care (except that Medicare covers 100 days of skilled nursing care).  Medicaid (which is health insurance for the very poor, funded by a partnership of Federal and State governments) does pay for nursing home care, but you must be impoverished to receive the insurance.  Long-term care costs are already high and they increase every year.  With respect to paying long-term care expenses there are three basic approaches:  paying the costs from your savings and investments, paying the costs with long-term insurance, or relying on Medicaid.

When the Affordable Care Act (a.k.a. Obamacare) was enacted, it included a provision called the Community Living Assistance Services and Supports Act to pay long-term care expenses if those enrolling in the coverage paid enough premiums to pay for all the expenses.  The government quickly discovered that the cost of care would far exceed the funding received from premiums and so the provision was abandoned before it became effective.  Recently, an article in the New York Times addressed Medicaid funding issues and the payment of long-term care expenses.  The article described the hard decision of whether someone should pay the premium costs of buying long-term care insurance.  The author concluded that it would be foolish to pay for premiums because the government will eventually come around to providing such coverage for everyone.  But this seems to be wishful thinking and a very irresponsible conclusion to me, waiting for the government to come to our rescue, when current entitlements are projected to run out of money and overwhelm the fiscal budget!

For those with modest assets of maybe several hundred thousand dollars or less, Medicaid planning may be the best route.  For those with more wealth of up to $5 million or maybe even $10 million, long-term care insurance may not actually be necessary to pay your costs, but the insurance could be very effective in preserving your estate for your heirs.  For those with more than $10 million, self-funding may be the most appropriate approach.

The best time to apply for long-term care insurance is probably before age 60.  As we age we tend to have more health problems which makes it harder to be accepted by the insurance company.  Good health can save premium dollars with a preferred health rating.  Poor health makes one uninsurable.

There are three basic types of long-term care insurance.  The traditional policy where you pay annual premiums for pure long-term care insurance.  Many insurance companies have abandoned these policies in recent years as their actuarial assumptions understated the cost of providing the insurance.  The other two types of policies are hybrid plans, one combining long-term care insurance with an income annuity and the other combining it with life insurance.  The hybrid policies tend to have higher premiums because the policies provide annuity or life insurance benefits in addition to the long-term care insurance.  Hybrid premiums are typically paid as a single premium or as a fixed payment over a period of time such as 10 years.  However, the hybrid policies may have less restrictive underwriting, the premiums usually won’t increase, and your heirs may receive money back if long-term care benefits aren’t used (the premiums are in effect returned by a death benefit).  Hybrid policies may also be surrendered for a return of some or all the premiums if you decide not to continue the policy, whereas premiums paid in a traditional policy are not recoverable.

Two decisions must be made:  1) whether to self-fund or purchase long-term care insurance, and 2) if insurance will be purchased, what type of policy should be purchased.  The answers depend upon your circumstances and you will be well served to be advised by someone knowledgeable in this area.  It is easy to procrastinate making these tough decisions and to find yourself in an endless analytical loop.  You must press forward until reaching a decision that makes the most sense for you.  Otherwise, a failure to plan will leave you exposed to future circumstances.

Your Solo-401(k) May Be Required to File Form 5500-EZ by July 31st

Solo-401(k)s or Uni-Ks are a great retirement plan for self-employed individuals.  The amount of deductible contributions you can make depends upon your net business income and your age.  The maximum for 2016 contributions is $59,000.  This amount consists of the following layers:

·        Standard 401(k) maximum contribution of $18,000.

·        Catch-up contribution of $6,000 if you are at least age 50 by the end of the year.

·        Profit-sharing contribution of $35,000 (defined contribution maximum of $53,000 as indexed for 2016 less the standard 401(k) amount of $18,000 that counts against the limit).  Note that the profit-sharing contribution is limited to either 20% or 25% of business net income depending upon the type of business entity.

Qualified retirement plans such as 401(k)s must file an annual Form 5500 with the IRS by the last day of the seventh month following the end of the plan year.  An extension is available.  Form 5500 is very complicated.  An easier Form 5500-EZ is available for a one-participant plan, and is only required if total plan assets at the end of the plan year exceed $250,000.  If plan assets do not exceed $250,000, then there is no required tax return filing.  A one-participant plan means:  1) a plan that covers and provides benefits to only you (or you and your spouse), and you (or you and your spouse) own the entire business (which may be incorporated or unincorporated) or 2) a plan that covers and provides benefits to one or more partners (or partners and their spouses) in a business partnership.  If you have multiple plans they must be aggregated for the $250,000 test.

A late filing penalty of $25 a day (up to $15,000) applies if Form 5500-EZ is not filed on time.  Filing Form 5500-EZ can sometimes be overlooked since the account is often considered just a personal investment account.

New Extension Granted for Certain Estates to Make the Portability Election

Prior to 2011, if the decedent spouse did not fully utilize his or her estate tax exemption in the estate plan, the unused portion was wasted and was not available to be used by the surviving spouse.  After 2010, the tax law was changed to permit an election whereby the unused exemption could be “ported” to the surviving spouse and add to that spouse’s own personal exemption amount.  The ported exemption is allowed for both gift and estate tax exemptions but not for the generation skipping transfer tax exemption.  The election is made by filing a timely estate tax return (Form 706, including a timely filed extension) for the decedent spouse.  The decision to make the portability election is not always an easy one to make because the cost of preparing a Form 706 can be expensive (depending upon the type of assets owned by the decedent spouse) and it is possible that the ported exemption may not ever be needed to exempt the surviving spouse’s estate from estate tax.  In addition, the portability election is often overlooked because its availability is not widely known or fully understood.

In Revenue Procedure 2014-18, the IRS granted an extension until December 31, 2014 to make the portability election for small estates that weren’t otherwise required to file an estate tax return and had missed the filing deadline.  Since this time the IRS has had to deal with numerous private letter ruling requests asking for extensions of time to make the election.  The IRS has now issued Revenue Procedure 2017-34 granting a permanent extension period.  The due date of the portability election is now extended to the later of January 2, 2018 or the second anniversary of the decedent’s death.  After this time period expires, a late filed portability election can only be made after seeking a private letter ruling from the IRS.

Only estates that are not otherwise required to file an estate tax return are permitted to use the Rev. Proc. 2017-34 extension period.  An estate is generally required to file an estate tax return if the total gross estate plus adjusted taxable gifts and specific exemption is more than the basic exclusion amount for the year of death (e.g., $5,490,000 for deaths in 2017).  In addition, the decedent must have died after 2010 and have been survived by a spouse, and an estate tax return must not have been previously filed.

The portability election can provide valuable estate tax benefits, but there can be reasons not to make the election.  The new revenue procedure allows small estates additional time to make this analysis.

Pres. Trump’s “Massive” Tax Cut Proposal

On April 26^th, the Administration proposed the “biggest tax cut and reform in U.S. history” as part of a drive to spur economic growth.  Some estimates have put the loss in tax revenues at $6.2 trillion over 10 years!  There is an obvious clash in priorities between the Administration and the Republican House of Representatives who are concerned about the Federal deficit.  Some pundits see the proposal as an “opening gambit” or bargaining position to cut a tax-reform deal with Congress.  Complicating matters is that unless the Senate passes tax-reform with at least 60 votes, then the new law will need to “sunset” in 10 years.  The 10-year sunset rule is termed the “Byrd rule” named after the long-time senator and applies to legislation that increases the deficit for longer than 10 years.  What will businesses and individuals do if the new tax law is only temporary?  This country dealt with a similar issue with the 2001 tax cuts under Pres. George W. Bush.  The temporary nature of the 2001 tax cuts created large uncertainties and caused regret among some taxpayers who engaged in protective tax planning strategies that ultimately proved to be unnecessary.  Some commentators have said that the loss in tax revenue might only be sustainable for two to three years!  In that case, the tax cuts won’t drive a change in business strategy or structure, it will just be a tax give away.

Let’s look at some of the major proposals.  These are generalized comments as there are no details yet.  The effective date is also unknown but might reasonably be assumed to be January 1, 2018.

Cut the Corporate Tax Rate from 35% to 15%

Corporations taxed as “C” corporations pay income tax.  The top tax rate is 35%.  The proposal drops the rate to 15%.  There will likely be a trade-off in the loss of certain deductions such as interest expense.  But these details are yet to be worked out.  C corporations will want to defer income into the next tax year and accelerate deductions into the current year.

Cut the “Pass-Through” Business Tax Rate from 39.6% to 15%

Business that are conducted through partnerships, limited liability companies taxed as partnerships, and Subchapter S corporations are considered “pass-through” entities.  Pass-through means that the requirement to pay income tax on the business profit is passed through to the owners of the business.  Individual owners include the business profit in their personal income tax returns.  This change is a necessary coordination with the C corporation tax rate cut; otherwise, pass-through entities would be incented to become C corporations for the tax savings.  It is uncertain whether businesses operated as a sole proprietorship would also benefit from the 15% rate.  It is also somewhat uncertain whether the net profit would have to be left in the business to benefit from the lower rate or if there would be a special carve-out of the lower rate in the individual income tax return for the pass-through business income.  An interesting issue concerns whether post-reform depreciation recapture upon the sale of a business asset will benefit from the 15% tax rate when depreciation deductions received a much higher tax rate benefit.

Cut the Top Individual Tax Rate from 39.6% to 35% and Reduce the Number of Rate Brackets

Currently the top individual income tax rate is 39.6% which was originally set under Pres. Bill Clinton, then reduced to 35% by Pres. George W. Bush, and then reinstated to 39.6% under Pres. Barrack Obama.  Now the see-saw drops back to 35%.  The trade-off is the loss of certain tax deductions.  The strategy for 2017 would be to defer income into 2018 and to accelerate deductions into 2017.  With the dramatic difference between the proposed business tax rate and the individual tax rate, there will be some incentive to convert personal income (such as compensation) into business income.

Currently there are seven tax rate brackets and the proposal reduces the number of brackets to only three:  10%, 25%, and 35%.  The income level for these brackets has not yet been determined.

Eliminate All Itemized Deductions Except Home Mortgage Interest and Charitable Contributions

Currently, itemized deductions include medical expenses, state and local income taxes, sales tax, real and personal property tax, home mortgage interest, investment interest, charitable donations, casualty and theft losses, unreimbursed employee expenses, accounting and legal advice for tax planning or compliance, investment expenses, gambling losses, and estate tax on income with respect to a decedent.  The loss of all but the home mortgage interest and charitable contribution deduction will have a large impact on some taxpayers.  As an example, those living in states that impose high income tax or property tax will be adversely affected.  However, in many instances, such taxpayers are subject to the alternative minimum tax (see below) and do not actually benefit from many of these itemized deductions.  The loss of these deductions coupled with the repeal of the AMT could leave some of these taxpayers better off.  Assuming a January 1, 2018 effective date, taxpayers should consider prepaying their 2017 state income tax to get the deduction before its repeal.

Importantly, there is no mention of Pres. Trump’s campaign promise to limit total itemized deductions to $100,000 for single filers or $200,000 for joint filers.

Double the Standard Deduction

The 2017 standard deduction is $6,350 for single; $9,350 for head of household; and $12,700 for joint filers.  Doubling the standard deduction will simplify tax returns for many moderate-income taxpayers by eliminating the need to itemize deductions.  Furthermore, there will be some impact from the loss of itemized deductions other than home mortgage interest and charitable contributions.  Itemizing will be beneficial only when those two types of deductions exceed the higher standard deduction.  No information was provided regarding the personal exemption.

Repeal the Alternative Minimum Tax (AMT)

The AMT is a bad tax.  Enacted many years ago to prevent a limited number of high-income taxpayers from avoiding income taxes all together, the AMT has morphed into a tax that is paid by over 33 million moderately high income taxpayers.  The AMT applies even if a taxpayer’s only deductions are the personal exemption and state and local income and property tax!  Repealing the AMT will go a long way toward simplifying the tax law, but it will cost the government a lot of tax revenue.

One specific problem that may be addressed in the legislative details is what happens to taxpayers with an AMT credit carryover.  For example, some taxpayers have exercised compensatory incentive stock options (ISOs) to purchase employer stock.  When an ISO is exercised and the stock is held for investment, there is no regular tax but there is AMT.  When the stock is later sold, there will be regular tax but that tax will be reduced by the AMT paid earlier (the AMT credit) when the ISO was exercised.  If there is no transition rule to preserve the AMT credit, then such taxpayers may wish to sell their ISO stock before the effective date of the repeal in order to avoid a double tax.

Repeal the Net Investment Income Tax (NIIT)

The NIIT was enacted under the Affordable Care Act (Obamacare) in 2013.  For the first time a payroll-type (Medicare) tax was applied to interest, dividends, capital gains, rents, etc.  This 3.8% tax is proposed to be repealed.  The rationale given for this repeal is to “restore” the top long-term capital gain tax rate back to 20% from 23.8%, inferring that there is no proposal to change the top capital gain tax rate.  Repealing the NIIT suggests that those contemplating a sale of a capital asset may want to defer the sale until after the repeal in order to benefit from the lower tax rate, assuming investment considerations don’t dictate an earlier sale.  Capital loss harvesting this year will be important in order to offset realized capital gains that otherwise would be taxed at the higher 2017 tax rate.

It is uncertain whether the additional 0.9% Medicare tax rate on earned income, enacted as part of the ACA, is also proposed to be repealed.

Eliminate the Estate Tax

Many conservatives have longed for the repeal of the “death tax.”  Eliminating the estate tax will have complicated interactions with the gift tax and the “step-up in basis” for the income tax.  It is uncertain whether the generation skipping transfer tax is also proposed to be repealed.  These details are yet to be worked out.  Taxpayers should not take permanent steps, such as canceling life insurance policies earmarked for the payment of estate tax, until there is some certainty in the law.  But the problem is that the tax law is never certain.  A future administration and Congress could simply re-enact the estate tax, and it could be difficult for taxpayers who canceled their life insurance, for example, to gain new coverage.  In addition, if tax reform is enacted with a 10-year sunset provision, the estate tax will reappear at that time.  The temporary estate tax repeal will benefit the estates of those likely to die during that time frame, but for the younger and healthier taxpayers, estate tax repeal will literally mean nothing as they will outlive the ten-year time frame!

Importantly, there was no mention of Pres. Trump’s campaign proposal to impose capital gain taxes on estates with assets over $10 million.

Review of Recent Tax Regulations

In addition to tax legislative proposals, Pres. Trump issued an executive order on April 21^st directing Treasury Secretary Mnuchin to review all “significant tax regulations” issued on or after January 1, 2016.  The objective of the review is to increase simplicity, fairness, and pro-growth regulations.

Two major regulations in the estate tax area could be in for review:  1) the complex “basis consistency” regulations (issued March 3, 2016) and 2) the controversial and pro-IRS valuation discount regulations (issued August 2, 2016).  Identification of the tax regulations to be reviewed is to be made by the third week in June with specific recommendations due by the middle of September to mitigate the burden imposed by such regulations.

IRA Tax Tips for the 2016 Tax Year

The IRS recently issued IRS Tax Tip 2017-29 for Individual Retirement Accounts (IRA) for the 2016 tax year.  This post reviews some of the tips and offers a few others.

1.      Age Rules.  Taxpayers must be under age 70½ at the end of the tax year to contribute to a traditional IRA.  There is no age limit to contribute to a Roth IRA (or to contribute to a SEP-IRA or a SIMPLE-IRA).

2.      Compensation Rules.  A taxpayer must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income.  It also includes tips, commissions, bonuses and alimony.  If a taxpayer is married and files a joint tax return, only one spouse needs to have compensation.

3.      When to Contribute.  Taxpayers may contribute to an IRA at any time during the year.  To count for 2016, a person must contribute by the due date of their tax return, not including extensions.  This means you must contribute by April 18, 2017.  Taxpayers who contribute between January 1 and April 18 need to advise the plan sponsor of the year they wish to apply the contribution (2016 or 2017).  From a financial planning perspective, you should contribute at the start of each calendar year.  That way your contribution has a 15 ½ month head start in earning money before the contribution deadline.  For example, contributing $5,500 over 30 years at a 6% rate of return at the beginning of the year (instead of at the end of the year) will result in a $31,000 higher IRA balance.

4.      Contribution Limits.  Generally, the most a taxpayer can contribute to their IRA for 2016 is the smaller of either their taxable compensation for the year or $5,500.  If the taxpayer is 50 or older at the end of 2016, the maximum amount they may contribute increases to $6,500.  However, the ability to contribute to a Roth IRA phases out at certain AGI levels.  If a person contributes more than these limits, a 6% annual penalty will apply to the excess until corrected.

5.      Deductibility Rules.  Taxpayers may be able to deduct some or all of their contributions to their traditional IRA.  These rules are complex and will depend upon your personal tax situation.  See IRS Information Release IR-2017-60 for more details.

6.      Taxability Rules.  Normally taxpayers don’t pay income tax on funds in a traditional IRA until they start taking distributions from it.  Qualified distributions from a Roth IRA are tax-free.  Unless an exception applies, distributions prior to age 59 ½ will incur a 10% penalty.

7.      Required Minimum Distributions (RMD).  Individuals who are age 70 ½ or older must take a RMD from their traditional IRA (but not from a Roth IRA) by December 31^st of each calendar year to avoid a 50% penalty on any required amount that was not received.  For the calendar a person turns age 70 ½, they may defer the first RMD to April 1^st of the following year.  For those turning age 70 ½ in 2016, the RMD must be received by April 1, 2017, even though that date falls on a Saturday.  There is no weekend rule that would enable receipt on Monday, April 3, 2017, to be considered timely.  If you chose to delay your 2016 RMD until April 1, 2017, your 2017 RMD must be received by December 31, 2017, which results in the doubling up of distributions.  For guidance on calculating the RMD see IRS Information Release IR-2017-63.  For charitably minded individuals, a qualified charitable distribution from a traditional IRA will count towards satisfying your RMD.