By: Ryan Wisniewski

When it comes time to start saving for college for a child or other beneficiary, other than beginning early, the most important recommendation is to take advantage of what Internal Revenue Code Section 529 has to offer.

Internal Revenue Code Section 529 allows savings accounts to be established in which account owners contribute funds to an account to pay for a beneficiaries’ education expenses.  Account owners can contribute up to amounts set by individual states.  For example, Connecticut allows contributions of up to $300,000 and New York allows contributions of up to $520,000 for all accounts held for the same beneficiary.  Once the aggregate account balances reach a total value in excess of these limits, contributions can no longer be made.  While there are no Federal tax deductions related to contributions to a 529 account, many states do offer tax deductions.  For example, Connecticut and New York both offer up to a maximum deduction of $10,000 per year for Married Filing Joint filers ($5,000 for Single).

The funds contributed to and the related earnings of a 529 College Savings Plan grow Federal and State tax-free and are distributed Federal and State tax-free, as long as they are used to pay for qualified education expenses.

Qualified education expenses include higher education expenses, summarized below:

• Tuition, fees, books, supplies, and equipment for attendance.
• Expenses for special needs services related to attendance.
• Room and board, limited to the greater of the allowance for financial aid purposes or the actual cost of campus housing.
• Cost of computer, peripheral equipment, software, and internet access.
• Up to a maximum amount of $10,000 of student loan principal or interest per beneficiary and sibling.

Qualified education expenses also include expenses related to K-12 enrollment or attendance at any public, private, or religious school, limited to $10,000 per beneficiary per year.

Qualified expenses do not include expenses that were paid for with tax-free assistance (For example: scholarships, grants, or other assistance) or those expenses used to calculate any education credits or deductions.  

IMPORTANT!  If you are income eligible for certain education credits or deductions, be sure that you pay enough education expenses out-of-pocket, using non-529 College Savings Plan account dollars, to maximize your allowable benefits.

IMPORTANT!  If you will need to fund college expenses out-of-pocket, and you did not contribute to a 529 plan during the year, consider contributing at least the state deductible amount.  You can then turn around and distribute the funds to pay for those college expenses.  While you might not earn any income on the amount contributed, due to the short-duration that the funds were in the account, you will at least receive up to a $10,000 state tax deduction (in regards to CT and NY; other states may vary) and all it cost you was some time to transfer funds around.

529 plans can be an effective way to save for anyone’s future education costs. Understanding who can contribute to an account, and the other rules about ownership, could help you maximize your potential benefits and potentially reach your savings goal faster. Consult an R+R tax advisor to assess your situation and determine the best way to proceed.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

After a one-year hiatus due to the COVID-19 pandemic, owners of qualified retirement plans and IRAs must adhere to the rules for required minimum distributions (RMDs). The RMD rules are tricky and could result in a substantial tax penalty if you’re not careful.

For starters, an RMD is the amount you must withdraw from a qualified retirement plan account or traditional IRA to avoid an expensive tax penalty after reaching the “magic” age. Here are the answers to 20 frequently asked questions (FAQs) about RMDs under current law.

1. What Was the One-Year Reprieve?

The CARES Act, which was enacted in March of 2020, suspended the RMD rules for the 2020 tax year. In fact, if you met certain timing requirements, you could “undo” RMDs taken earlier in the year. Now the standard rules are back in effect for the 2021 tax year and beyond. 

2. Which Plans Do the Rules Apply To?

The RMD rules apply to all employer-sponsored retirement plans, including:

• 401(k) plans;
• 403(b) plans;
• 457(b) plans;
• Profit sharing plans, and;
• Other defined contribution plans.

The rules also cover traditional IRAs and IRA-based plans, such as SEPs, SARSEPs and SIMPLE-IRAs. But there are exceptions in certain limited circumstances.

3. Do the Rules Apply to Roth Accounts?

The RMD rules also apply to Roth 401(k) accounts. However, they don’t apply to Roth IRAs while the original owner is alive. One way to avoid RMDs on your Roth 401(k) is to roll over the balance into your own Roth IRA.

After your death, however, beneficiaries of your Roth IRA must take RMDs under the same rules that apply to traditional IRAs. Because it’s a Roth IRA, the distributions will be tax-free, if the rules for qualified withdrawals are met.

4. When Must I Start Taking RMDs?

Previously, the required beginning date (RBD) was April 1 of the year after the year in which you turn 70½. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act pushed back the RBD to 72 for individuals who reach 70½ after 2019.

5. When Must I Take RMDs in Succeeding Years?

The deadline for taking subsequent RMDs is December 31 of the calendar year for which the RMD applies. Therefore, if you have to take your first RMD for the 2021 tax year by April 1, 2022, you must also take your RMD for the 2022 calendar year by December 31, 2022. To reduce overall tax liability, you might take the first RMD in 2021 instead of taking two RMDs in 2022.

6. How Do I Calculate the Annual RMD?

Generally, you just divide the balance in the plan or IRA on December 31 of the prior year by the appropriate life expectancy factor. However, your company plan or IRA trustee or custodian will usually calculate annual RMD amounts for you. The IRS provides the following life expectancy tables for taxpayers to use to calculate RMDs:

• Joint life and last survivor expectancy table. This table applies if the sole beneficiary of the account is your spouse and he or she is more than 10 years younger than you.
• Uniform lifetime table. This table applies if you’re unmarried, or if your spouse isn’t your sole beneficiary, or if your spouse isn’t more than 10 years younger than you.
• Single life expectancy table. This table applies if you’re the beneficiary of an inherited account.

To illustrate, suppose a single 80-year-old with an account balance of $187,000 at the end of the previous year has designated a child as the sole beneficiary. Using the uniform lifetime table, the divisor for an unmarried 80-year-old account owner is 18.7. Thus, you would divide $187,000 by 18.7, resulting in an RMD of $10,000.

7. Can I Withdraw More Than the Required Amount?

There’s no restriction against taking bigger-than-required distributions. You can take out as much as you want as long as you take at least the RMD amount for the calendar year.

8. Can I Get Credit in a Future Year for a Bigger-than-Required Distribution?

The RMD for each calendar year is calculated based on the account balance at the end of the prior year and the applicable life expectancy factor for that year. So, you can’t get a credit in a future year if you take a bigger-than-required distribution this year.

9. Must I Take RMDs From All Qualified Plans and IRAs?

You must calculate the RMD separately for each IRA you own. But you can withdraw the total amount from just one IRA or any combination of IRAs that you choose. The same rule applies to 403(b) plans. However, for all other qualified plans, the RMD must be taken separately from each plan account.

10. Will My Plan Administrator or IRA Trustee or Custodian Ensure that My RMD Is Made on Time?

A plan administrator or IRA trustee or custodian may provide the information for you to calculate RMDs or do the calculation for you. But it’s ultimately your responsibility to take the RMD for the applicable tax year. (See “Don’t Wait Until the Last Minute” at right.)

11. How Do I Estimate the Penalty?

Subtract any distributions that you took from the RMD amount that you should have taken. The RMD penalty equals 50% of that difference. For example, if you were required to withdraw $10,000 and took out only $2,500, the penalty is $3,750 (50% x $7,500). If you make this same mistake for several years, the penalties will continue piling up until you start taking the proper RMD amounts. 

The penalty is in addition to any other income tax that you owe for the year. Penalties are the responsibility of the account owner, not the retirement plan or IRA trustee or custodian.

12. How Do I Estimate the Income Tax on an RMD?

The taxable portion of any RMD is taxed at ordinary income rates. But any amount attributable to a return of basis in the account is tax free. As mentioned earlier, the RMD rules don’t apply to an original Roth IRA owner (the person for whom the account was originally set up).

13. Are There Any Exceptions to the RMD Penalty?

The penalty may be waived if you can show that the shortfall was due to reasonable error and you’re taking steps to remedy it. Your tax advisor can help draft a letter of explanation and file the appropriate tax form to demonstrate why your situation qualifies for an exception.

14. Are RMDs Subject to the NIIT?

Distributions from qualified retirement plans and IRAs aren’t included in net investment income for purposes of the 3.8% net investment income tax (NIIT). However, RMDs will drive up your modified adjusted gross income, which could trigger or increase NIIT liability on your net investment income.

15. If I Take RMDs, Can I Still Contribute to a Qualified Employer Plan or IRA?

RMDs don’t affect your eligibility for contributions to qualified retirement plans. So, if an 80-year-old employee still works and participates in a qualified employer plan, his or her employer must make contributions on the individual’s behalf and give the employee the option to continue making salary deferrals if the plan permits them. Otherwise, the employer’s plan could lose its qualified status.

Previously, you couldn’t contribute to a traditional IRA after you turned 70½. However, the SECURE Act removes this limitation. For 2020 and thereafter, there’s no age restriction. But you must have earned income that at least equals your contribution. There has never been any age restriction on Roth IRA contributions, but you must have earned income that at least equals your contribution.

16. Do I Have to Take RMDs If I’m Still Working?

Generally, you must take RMDs from all qualified plans and traditional IRAs. However, you don’t have to withdraw an RMD from your employer’s qualified plan if you still work full-time for the employer and you don’t own 5% or more of the company (attribution rules apply). There’s no similar exception for traditional IRAs.

In addition, you must still take RMDs from qualified plan accounts that you may still have at former employers. (That is, accounts that haven’t been rolled over to your current employer’s plan.)

17. Can I Roll Over an RMD to another IRA or Tax-Deferred Retirement Plan?

Rollovers are strictly prohibited. Allowing retirees to roll over RMDs to other retirement accounts would defeat the purpose of the mandatory distribution rules.

18. Can I Donate RMDs to Charities?

For IRAs, the answer is yes. The tax law allows you to annually transfer up to $100,000 directly from an IRA to an IRS-approved charity without paying tax on the distribution, and the distribution counts towards your RMD obligation for the year. However, you can’t deduct the charitable contribution. If your spouse has an IRA set up in his or her own name, your spouse is entitled to a separate $100,000 limit.  

19. What Happens If I Die Before RMDs Start?

If you die before the RBD, no RMD is required for the year of death. For subsequent years, beneficiaries must take RMDs from inherited accounts. Under the SECURE Act, the account usually must be emptied out within 10 years, subject to exceptions for so-called “eligible designated beneficiaries,” such as a beneficiary who is disabled or has not yet reached the legal age of majority. Also, the 10-year rule doesn’t apply to beneficiaries of account owners who died before 2020.

20. What Happens If I Die after RMDs Start?

If you die on or after the RBD, the beneficiary of the inherited account must take an RMD for the year that you passed away. The inherited account usually must be emptied out within ten years, subject to exceptions for spousal beneficiaries and eligible designated beneficiaries. Also, the 10-year rule doesn’t apply to beneficiaries of account owners who died before 2020.

POSSIBLE CHANGES IN THE WORKS

In recent months, some legislators have discussed the possibility of more tinkering with the RMD rules. For instance, one proposal would push back the RBD even further to the year after you turn 75. But no changes appear imminent as of this writing. Contact an R+R tax advisor if you have questions about how the RMD rules impact your company qualified retirement plan account(s) and your IRA(s).

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

Connecticut becomes the first state to pass a new law regarding disclosure of salary ranges. Governor Ned Lamont signed into law June 7, 2021, the Act Concerning the Disclosure of Salary Range for a Vacant Position (Act). The Act, which goes into effective October 1, 2021, requires employers to disclose to job applicants and employees the salary ranges for positions.

The new law also expands Connecticut’s prohibition of gender-based pay discrimination from requiring equal pay for “equal work” to equal pay for “comparable work.”

Under the Act, Connecticut employers must:

• Provide an applicant the wage range for a position for which the applicant is applying upon the earliest of (1) the applicant’s request, or (2) prior to or at the time the applicant is made an offer of compensation.
• Provide an employee the wage range for the employee’s position upon (1) the hiring of the employee, (2) a change in the employee’s position with the employer, or (3) the employee’s first request for a wage range.

The law defines “wage range” as “the ranges of wages an employer anticipates relying on when setting wages for a position.” It can include reference to pay scales, previously determined wages for the position, actual ranges for the employees who currently hold a comparable position, or the employer’s budgeted amount for the position.

Significantly, the law allows employees or prospective employees to bring a private right of action to address alleged violations of the law. If successful, the individual can seek compensatory damages, attorneys’ fees and costs, punitive damages, and other equitable relief.

Until amended by the Act, Connecticut’s prohibition on gender-based pay discrimination provided that an employer could not pay an employee less than what the employer was paying an employee of the opposite sex for equal work. Under the Act, employers cannot discriminate on wage rates paid to employees of opposite sex for “comparable work on a job, when viewed as composite of skill, effort and responsibility and performed under similar working conditions.”

Employers can only justify differences in pay if it is based on (a) a seniority system, (b) a merit system, (c) a system that measures earnings by quantity or quality of production, or (d) a differential system based upon a bona fide factor other than sex, “including, but not limited to, education, training, credential, skill, geographic location or experience.”

Connecticut Employers Next Steps:

• Employers should, before October 1, 2021, review their personnel practices to ensure a system is in place for timely responding to applicant and employee requests for wage range information;
• Employers should create wage ranges for all positions if they do not currently exist;
• Employers should inform human resources and other hiring staff about the wage range disclosure requirements;
• Employers should consider conducting an audit of pay rates and job descriptions to ensure that there are no pay differences within each position that cannot be explained by one of the bona fide factors outlined in the Act.

Katie Hall, Director of HR Consulting

Need assistance navigating these new wage disclosure requirements, and to ensure your hiring policies are implemented and/or updated accordingly? Email Katie

With over a decade of diversified knowledge, Katie has extensive experience leading HR initiatives including policy design, compensation, performance management, recruiting, compliance reporting, HR workflow development, training and development, and benefits administration. She assists R+R clients with recruiting and retaining quality staff working closely with businesses in regards to their benefits, training and compensation programs.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

Do you own a vacation home?

If so and you rent it to third parties, you may be confused about the federal income tax rules that apply. Confusion is especially common if you changed your usage pattern during the pandemic. It may have caused your property to be classified as a personal residence — rather than a rental property — for federal income tax purposes.

Here’s an overview of the tax implications for vacation homes that fall into the personal residence category.

No Rental Income, No Problem

If you own a vacation property that you don’t rent out during the year, it’s obviously treated as a personal residence for federal income tax purposes. Unfavorable changes made by the Tax Cuts and Jobs Act (TCJA) can affect your itemized deductions for mortgage interest and property taxes. For instance, if you have a jumbo mortgage on your main residence and pay heavy property taxes on it, there may be no room left to deduct mortgage interest or property taxes on your vacation home.

The TCJA limits itemized deductions for mortgage interest to interest paid on the first $750,000 of home acquisition debt generally starting with loans taken out after December 15, 2017. Preexisting home acquisition debts are grandfathered under the prior law limit of $1 million.

In addition, through 2025, itemized deductions for personal state and local taxes are limited to a combined total of only $10,000 ($5,000 for married filing separately). The limitation applies to state and local 1) income (or sales) taxes and 2) property taxes. Moreover, personal foreign real property taxes can no longer be deducted. So, if you’re lucky enough to own a vacation villa in the Bahamas or a beach condo in Cancun, you can’t deduct the property taxes.

Properties Rented for Fewer than 15 Days

A special federal income tax break is available if you rent out your vacation home for less than 15 days during the year and use it for personal purposes for more than 14 days. This scenario often happens with vacation homes located near major events, such as professional golf tournaments. Here, you don’t need to report any rental income. The rental activity is completely disregarded for federal income tax purposes.

You can report any allowable itemized deductions for mortgage interest and property taxes on your personal tax return. The only drawback is that you can’t deduct other expenses attributable to the rental period, such as advertising and cleaning costs.       

Personal Residence vs. Rental Property

Assuming your place doesn’t qualify for the special break for properties rented for fewer than 15 days, here’s what the Internal Revenue Code and IRS regulations say about how to classify “mixed-use” vacation properties that have both personal and rental use during the year.   

Your vacation home is classified as a personal residence if:

• You rent it out for more than 14 days during the year, and
• Personal use during the year exceeds the greater of 14 days or 10% of the days you rent the home out at fair market rates.

Personal use means use by the owner, certain family members and any other party (family member or otherwise) who pays less than fair market rental rates. If your vacation home is used by another person under a reciprocal arrangement (“I use your place and you use mine”), such use is also considered personal use.

Consider this example: During 2021, your family and friends use your beachfront condo for 120 days. You rent the place out to third parties at market rates for 210 days. This condo is classified as a personal residence for the year because your personal use exceeds the greater of 1) 14 days, or 2) 10% of the rental days.

Conversely, your vacation home is classified as a rental property if:

• You rent it out for more than 14 days during the year, and
• Personal use during the year doesn’t exceed the greater of 14 days or 10% of the days you rent the home out at fair market rates.

Again, count only actual days of rental and personal use. Also disregard days of vacancy and days spent mainly on repair and maintenance activities.

Here’s another example: During 2021, you rent your beachfront condo to third parties at market rates for 300 days. Your family uses the condo for 30 days. This condo is classified as rental property for the year, because personal use doesn’t exceed the greater of 1) 14 days, or 2) 10% of the rental days. A different set of tax rules applies to rental properties.

Year-End Planning Considerations

You may be able to manage the number of rental and personal-use days between now and year end. How you decide to use the property for the remainder of the year may have important tax implications.

For instance, you and family members may be anxious to spend more time at your vacation home and less time in the big city. That could place your vacation home firmly into the personal residence category. If so, adding more personal-use days may increase current itemized deductions for qualified residence interest expense and property taxes.

However, if you’re affected by the TCJA limitations on interest expense and property taxes, adding more personal-use days may just result in bigger personal-use allocations of interest expense and property taxes that you can’t currently write off as itemized deductions because of the TCJA limitations.

Alternatively, the current rental demand for your vacation home may be so high that you can’t resist the opportunity to collect more rental income. That could put your place into the rental property category.

What’s Right for Your Property?

As you can see, the federal income tax rules for vacation homes can be complicated. And tax results will depend on your exact situation. Consult an R+R tax professional for advice on how to get the best tax results in your situation.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.