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