A reader email involves a required minimum distribution that was not taken in a timely manner, but the error rested with the IRA's custodian and not the owner of the IRA.

"Franklin" put in the request with the custodian in early December of 2022 for the RMD for both his IRA and his wife's IRA ahead of the Dec. 31 deadline. While his RMD was executed properly, his wife's was not, an error that was not discovered by Franklin until early January 2023.

Franklin notified the custodian, which then carried out the instructions for disbursing his wife's RMD in January 2023.

Franklin completed the couple's joint tax return for tax year 2022 and attached Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts," requesting a waiver of the penalty for a late disbursement. He included a letter of explanation, as well as a letter from the custodian that admitted the error.

He recently received a notice from the IRS saying he should file Form 1040-X (tinyurl.com/ymubbxjj), which would amend his 1040 tax return for 2022, along with a completed Form 5329, which he had already sent with his original tax return.

What should you do when you receive this type of notice?

I consulted with an IRS spokesperson, who, by law, cannot comment directly on any taxpayer's particular situation. But the spokesperson did offer the following general advice about receiving an IRS notice:

"When you receive an IRS notice, there is typically a phone number you can call. It is specific to that notice and not the general IRS taxpayer assistance hotline.

"You can call that number if you have questions about your notice. In some instances, you may even be able to resolve the issue by calling that number. In other instances, you may need to respond in writing."

Another reader, "Albert," has been researching zero rate tax treatment on investment income and capital gains on the IRS website, but to no avail. The IRS spokesperson offered these insights:

Start with the Qualified Dividends and Capital Gain Tax Worksheet in the instructions to Form 1040 (tinyurl.com/4fse779k). (Please note: The current version on the IRS website is for tax year 2022.) The result of calculation on the worksheet will take you to Form 1040, Line 16.

"Some taxpayers need to use the longer worksheet, found in the Schedule D instructions," the spokesperson said, adding that if tax software is used to prepare a return, the worksheets will be reflected in the software's tax calculation. (Schedule D for tax year 2022 can be found at tinyurl.com/bdfwhp2s.)

The bottom line: Getting a zero tax rate on dividends and capital gains depends on your marginal tax rate. Dividends and capital gains are effectively tax-free when the taxpayer's marginal tax rate is below 15%.

"Under the current law's rate structure, that means people who are in the 0%, 10% or 12% marginal bracket," explained the IRS representative. "As reflected in the worksheets in the 2022 instructions, that means, for example, joint filers with taxable income below $83,350 and single filers with taxable income below $41,675."

For tax year 2023, the maximum zero rate figures are $44,625 for single filers and $89,250 for married couples filing jointly (tinyurl.com/4dz42m6e).

"For people whose taxable income is above those thresholds, part of their qualified dividends and capital gains may be taxed at the zero rate, even if the rest is taxed at higher rates," the spokesperson said.

"Note that taxable income is the amount you get after subtracting the standard deduction or itemized deductions and other deductions, so it is typically less (and sometimes much less) than gross income," the spokesperson added.

As always, be sure to consult your tax adviser, as taxes are unique to the individual.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

It’s time to review annual changes for retirement plan contribution limits.

On Nov. 1, the IRS released the new contribution limits for 2024 for 401(k)s and IRAs through Notice 2023-75 (tinyurl.com/4e697hue). The increase in limits is based on annual cost-of-living adjustments required under Section 415(d) of the Internal Revenue Code (tinyurl.com/y5ud48fk).

For 401(k)s, 403(b)s, most 457 plans and the federal government’s Thrift Savings Plan (defined contribution plans), the new limit is $23,000, up from $22,500 in 2023. The $500 increase is smaller than last year’s $2,000 jump from $20,500 to $22,500.

The catch-up contribution limit for employees 50 and older remains at $7,500 for 2024. For those employees, their total contribution can be as much as $30,500 in 2024.

The combined limit of employee and employer contributions increases by $3,000 in 2024 to $69,000 from $66,000 (the increase in 2023 was $5,000 more than in 2022). If you are eligible for catch-up contributions, the maximum combined limit is $76,500 in 2024.

Let’s turn to IRAs. The limit on annual contributions has increased to $7,000 in 2024 from $6,500 in 2023, the second consecutive year it has risen by $500 (tinyurl.com/znpvc7mb). Keep in mind that $7,000 is the total amount you can contribute to all of your traditional IRA and Roth IRA accounts in 2024.

If you are 50 or older, you can add $1,000 as a catch-up contribution in 2024 for a total maximum contribution of $8,000. This $1,000 has not increased from the 2023 limit despite the fact that the SECURE 2.0 Act of 2022 amended the rule for IRA catch-up contributions to include an annual cost-of-living adjustment.

Deductible contributions to traditional IRAs are based on modified adjusted gross income, or MAGI:

-- For a single taxpayer or head of household covered by a workplace retirement plan, the phase-out range is increased to between $77,000 and $87,000 (up from $73,000 and $83,000 in 2023).

-- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is between $123,000 and $143,000 (up from $116,000 and $136,000 in 2023).

-- For a person who is contributing to an IRA and is not covered by a workplace retirement plan but is married to someone who is covered, the phase-out range is between $230,000 and $240,000 (up from $218,000 and $228,000 in 2023).

For contributions to Roth IRAs, the income phase-out ranges are:

-- Between $146,000 and $161,000 for singles and heads of households (up from $138,000 and $153,000 in 2023).

-- Between $230,000 and $240,000 for married couples filing jointly (up from $218,000 and $228,000 in 2023).

More people will be able to take advantage of the Saver’s Credit (also known as the Retirement Savings Contributions Credit), which is a retirement savings tax credit available for taxpayers in lower- or middle-income groups.

The income limit will be $76,500 in 2024 for married couples filing jointly (up from $73,000 in 2023); $57,375 for heads of household (up from $54,750); and $38,250 for singles and married individuals filing separately (up from $36,500).

You can see more details about the Saver’s Credit at tinyurl.com/368fvwp8.

If you are charitably inclined and over age 70 1/2, you’ll be able to contribute more to charity using the QCD (qualified charitable distribution). The limit in 2024 will be $105,000, up from $100,000 in 2023. The increase is due to “changes made under SECURE 2.0,” according to Notice 2023-75.

And, a reminder: Some people who are eligible but not participating in their 401(k)s desperately need someone to encourage them to study their plans. If you’ve done your homework and can mentor others, tell me your story by applying for the 2023 401(k) Champion Award. This is a pro bono initiative I sponsor to help employees help each other to save for retirement. Three 401(k) Champions receive $1,000 each. Apply at 401kchampion.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

Are you a well-intentioned grandparent who wants to share your stock-picking acumen with your young grandchildren -- and back that up with a gift of cash?

Set up a brokerage account under the Uniform Gift to Minors Act (UGMA). The account would belong to your grandchild; you would be the custodian directing trades. If you keep the gift at or below $17,000, there will be no gift-tax consequence.

The UGMA (comparable to a UTMA -- Uniform Transfer to Minors Act) is "a custodial account that allows you to give money to a minor while maintaining control over the money until the child reaches the age of majority," according to T. Rowe Price, a global investment management firm (tinyurl.com/48xeakva).

The UGMA allows you to buy stocks, bonds, mutual funds and other investments offered through the brokerage firm on behalf of your minor grandchild. Unlike a 529 plan to fund college expenses, there is no limit on how money in a UGMA is to be used, and there are no penalties to be concerned about. The grandchild gains control of the account upon reaching the age of majority, which varies state by state (see tinyurl.com/4wbksnxr).

Handling taxes on capital gains, interest and dividends ("unearned income") on the UGMA would be easy if the grandparent, as custodian, were responsible for the tax filing, but that's not the case.

This is where the Kiddie Tax enters into the picture, and the best resource on this subject is IRS Tax Topic No. 553, "Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)" (tinyurl.com/4zy32s74). The bottom line: The tax liability on unearned income is the child's.

For the 2023 tax year, the first $1,250 of a child's unearned income qualifies for the standard deduction, which means that if the UGMA is the grandchild's only account, $1,250 of unearned income is tax-free. Unearned income above $2,500 is taxed at the parent's marginal income tax rate, and unearned income between $1,250 and $2,500 is taxed at the child's income tax rate (tinyurl.com/2hn6rauj).

Of course, a minor grandchild does not file his or her own tax return. Parents would use IRS Form 8615, "Tax for Certain Children Who Have Unearned Income," to file a return for their child (tinyurl.com/y6k9d4a2).

However, instead of filing Form 8615, the parents have an option of including their child's unearned income on their own tax returns by filing Form 8814, but only if the child's unearned income is less than $12,500 in 2023.

If the parents of the child aren't crazy about UGMAs but love 529s as a way of saving for their child's future education, there is a possibility of turning that UGMA into a 529, but the grandparent would lose the ability to buy individual stocks.

As a reminder, a 529 account is considered a qualified tuition program "that allows a contributor either to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses," quoting IRS Tax Topic 313 (tinyurl.com/mr2mw6hz).

How would a transfer of a UGMA to a 529 work? According to a Fidelity Investments spokesperson, that would require the sale of the assets in the UGMA to free up cash to send to a 529 plan, as "all contributions made to a 529 must be in cash -- whether they are coming from a UGMA/UTMA or not."

A grandparent could liquidate a UGMA account to open a new UGMA (or UTMA) 529 account for the grandchild, or the grandparent could contribute the cash to a UGMA 529 account opened by the parents, according to the spokesperson.

Here's a word of caution: Each taxpayer's situation is unique. Be sure to check with your tax adviser before taking any action that results in tax consequences.

On another note: The 2023 national 401(k) Champion competition, which I sponsor, recognizes those 401(k) participants who understand the value of their 401(k)s enough to encourage friends, family and co-workers to learn about retirement security. If you would like to compete for the title of 401(k) Champion, apply at 401kchampion.com. There is no cost. This is a project I fund in my role as a proponent of financial literacy education.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION