There are many important tax changes taking effect in 2015. They are the result of the Tax Increase Prevention Act of 2014 (TIPA) as well as other tax legislation, or are triggered by effective dates in regs, rulings, and other guidance.
An individual receiving an IRA distribution on or after Jan. 1, 2015, cannot roll over any portion of the distribution into an IRA if the individual has received a distribution form any IRA in the preceding 1-year period that was rolled over into an IRA. Under previous rules, the one-rollover-per-year limitation applied on an IRA-by-IRA basis. The change was precipitated by the Tax Court’s decision that the limitation applies on an aggregate basis, meaning that an individual could not make more than one nontaxable 60-day rollover within each 1-year period even if the rollovers involved different IRAs.
However, as a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of determining whether a 2015 distributions can be rolled over, provided that the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution. In other words, the Bobrow aggregation rule, which takes into account all distributions and rollovers among an individual’s IRAs, will apply to distributions from different IRAs only if each of the distributions occurs after 2014.
New single distribution rule for retirement plans.
Beginning Jan. 1, 2015, when qualified plan participants choose to direct their retirement plan distribution to go to multiple destinations, the amounts will be treated as a single distribution for allocation pre-tax and after-tax basis. This change will allow qualified, 403(b) and 457(b) governmental retirement plan participants to:
- roll over amounts to both a Roth IRA and a non-Roth IR
- allocate the pre-tax amount of the distribution to the non-Roth IRA and the after-tax amount to the Roth IRA
- avoid having to pay income tax on pre-tax amount rolled over the non-Roth IRA.
Under previous rules, each destination of a retirement plan distribution (e.g., a distribution split between a direct rollover to an IRA and an actual distribution of funds) was considered a separate distribution. If a participant’s account balance contained both pre-tax and after-tax amounts, each distribution included a pro rata share of both. A participant could not choose to transfer the pre-tax amount to a traditional IRA and the after-tax amount to a Roth IRA.
Transition rules provide the plan sponsors may apply the new allocation rule to distributions made on or after Sept. 18, 2014, and apply a reasonable interpretation of the allocation rules for distributions made before Sept. 18, 2014.
New investment direction rule for 520 plans.
The code provides that a program is not treated as a qualified tuition plan unless it provides that any contributor to, or designated beneficiary under, the program may not directly or indirectly direct the investment of any contributions to the program. However, for tax years that begin after Dec. 31, 2014, TIPA allows 529 qualified tuition plans to permit investment direction by an account contributor or designated beneficiary up to two times per year.
ABLE accounts for the disabled may be established.
For tax years beginning after Dec. 31, 2014, TIPA allows states to establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts to assist persons with disabilities in building an account to pay for qualified disability expenses. Similar to a QTP, a tax exemption is allowed for an ABLE program. Amounts in an ABLE account accumulate on a tax-exempt (or, in some cases, tax-deferred) basis, and distributions are tax-free if made for “qualified disability expenses.”
Except in the case of a rollover contribution from another account, an ABLE program must limit the aggregate contributions from all contributors for a tax year to the amount of the annual gift tax exclusion for that tax year ($14,000 for 2015, adjusted annually for inflation).
Inflation adjustment for certain civil penalties.
For returns required to be filed after Dec. 31, 2014, TIPA indexes for inflation each calendar year the fixed-dollar civil tax penalties under current law for: (1) failure to file a tax return or to pay tax; (2) failure to file certain information returns, registration statements, and certain other statements; (3) failure of a paid preparer to meet certain obligations; (4) failure of a partnership or an S corporation to file a return; and (5) failure to file correct information returns and payee statements.
Limit on electronic refunds.
Effective January 2015, new IRS procedures limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three. The fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer. The limit is intended to help combat fraud and identity theft.
The vast majority of taxpayers will not be affected by this limitation, but it may affect some taxpayers, such as families in which the parent’s and children’s refunds are deposited into a family-held bank account. Taxpayers in this situation should make other deposit arrangements or expect to receive paper refund checks.
IRS says the new limit also will protect taxpayers from prepares who obtain payment for their tax preparations services by depositing part or all of their clients’ refunds into the preparers’ own bank account. Direct deposit must only be made to accounts bearing the taxpayer’s name. Preparer fees cannot be recovered by using Form 8888 (Allocation of Refund (Including Savings Bond Purchases) to split the refund or by preparers opening a joint bank account with taxpayers.
Please contact us if you have any questions about these updates 417-881-0145.