Q: I started taking required distributions from my IRA last year and they withheld taxes that I had already handled with estimated tax payments. The custodian told me they have to do that unless I tell them otherwise. I thought the rule was exactly the opposite. I had heard you can direct them to withhold if you need to. Why would someone withhold when you don’t want them to?
A: The rule actually is that the payor of an IRA distribution must withhold unless directed not to. But the recipient of the distribution must be told what their options are before the distribution.
There is a different rule for periodic and non-periodic payments, but the basic idea is that the government wants you to withhold to make sure your tax liability is not understated.
You have non-periodic payments. That is, you are not receiving annuity payments from your IRA. The withholding will continue until you direct the custodian to not withhold.
Once you tell them not to withhold, they will provide you with an annual election statement, and they must advise you to make estimated payments if you do not withhold.
The 2017 withholdings may have caused you to be overpaid for that year if you had already made sufficient estimated payments. But moving forward, you may want to continue with the IRA withholdings.
If you are making estimated payments, they must be remitted on a quarterly basis to avoid penalties. Withholdings can be a better way to pay your tax liability because the withholding is deemed to occur throughout the year.
This means you can have a year-end withholding that covers your required payments for the earlier quarters of the year. You can also avoid sending quarterly checks.
Whatever you decide, the rule providing for withholding unless you elect out is really designed to make sure that the recipient is not underpaid on their quarterly obligations. Many people don’t plan as carefully as you do.
Q: I was born in March 1959 so I will turn 59 ½ later this year. I need to take some money out of an IRA, and the penalty can be avoided if the distribution is taken when you are 59 ½ . My question is whether this is like the minimum distribution rule, where you can take the distribution any time during the year. My financial need is this summer. If I take the distribution in the year that I turn 59 ½ , is that OK for penalty purposes, or do I actually need to wait until September?
A: You will need to wait until you actually turn 59 ½ . This will be 6 months after your 59th birthday. You’ll need to wait until the actual day.
Some commentators think you turn 59½ the day before 6 months after your 59th birthday. That rule would address someone born February 29. Social Security follows that rule, but I have found nothing suggesting the tax law also does.
The rule to avoid a penalty is a bit different than the required minimum distribution rule. The RMD rule is intended to force a distribution, so you can take the RMD any time during the year you reach 70½ or even by April 1 of the following year.
The 59½ rule to avoid a penalty forces you to wait to take funds out of what is intended to be a retirement plan. So you actually have to reach the full age 59½.
Q: The new $10,000 limit on property taxes and income taxes – is that the same for married and single taxpayers, or is the single number half of the married?
A: The limit is $10,000 for both single and married filing joint filers. It is $5,000 for married filing separate.
New Mexico is less likely to be adversely affected by this limit than high-income, high-tax states such as New York and California.
Taxes are generally itemized deductions, and so the increased standard deduction, which means that most taxpayers will not itemize deductions, will make the $10,000 limit of less consequence.
The $10,000 limit applies only to taxes reported as itemized deductions. Taxes paid on rental property are deducted on schedule E and are unaffected by the new limit.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.