Inherited IRA & 401(k) plans

If you inherit an IRA or 401(k) plan you have to be careful to understand the legal & tax implications before you make any moves! If you handle it the wrong way you might be stuck with paying Federal & state income taxes on the entire amount in the plan as a total distribution all in one year.

Many people are surprised to find out that the funds they withdraw from an inherited IRA are subject to income tax, since most inherited assets are not (only subject to estate taxes if it is a large estate). However, since the original owner of the plan never paid income tax on those funds they are passed to the beneficiary with the same "pre-tax" status.

Fortunately, the person who inherits the plan has the option of deferring some or all of the tax until a later time:

Exception to 10% early withdrawal penalty - the funds distributed from a deceased persons IRA are not subject to the early withdrawal penalty regardless of the ages of either the deceased person or the person who inherits the IRA.

Spouse - a spouse who inherits an IRA or 401(k) plan has the option of rolling over into his/her own IRA within 60 days. However, you want to make sure to seek the advice of a tax professional because there can be downsides to this type of rollover since the funds that were rolled over now take on the characteristics of the new owner's IRA. For example if the spouse who inherits a plan is under age 59 1/2 and rolls the funds into his/her own IRA the 10% premature distribution penalty will now apply to any withdrawal of the inherited funds from the IRA.

Non-spouse beneficiaries - for any person other than a spouse who inherits an IRA or 401(k) plan you need to make sure it is a "trustee to trustee" rollover & it has to be rolled over directly into a special plan known as an "inherited IRA". If there is more than one beneficiaries you can have the rollover split directly into separate inherited IRA's. Make sure not to have a check issued to you by the trustee of the original plan if you are intending a rollover!

Required Minimum Distributions (RMD) - depending on the age of the original owner the person who inherits the plan will be required to make distributions from the plan (sometimes beginning immediately). This is another part of the equation that requires a good tax plan so make sure you have competent tax advice so you can optimize the amount & timing of these distributions.

This is a complicated area which has many variables. Charles Schwab has an excellent booklet on the various options and rules involved. This is not an endorsement for their financial services, just an endorsement for their book which is very informative and well written. Most financial institutions should be able to set up an inherited IRA, so you can choose who ever you are comfortable with to set up your new account.

California Use Tax - new regulations

In an attempt to squeeze more revenue out of the businesses which operate in the state of California, The California Board of Equalization has been sending threatening letters out to certain business owners demanding they file "delinquent" Use Tax Returns. These are businesses which are unaccustomed to filing this type of tax return.

If you purchased equipment which was used in the operation of your business for which you did not pay sales tax because you purchased it on the internet or out of state you are subject to use tax - more information on use tax..

Due to recent legislation, any business with gross receipts of $100,000 or more who does not already have a seller's permit with the SBOE are required to register as a "qualified purchaser" and must file use tax returns annually. Since most retail business already have a seller's permit & file sales/use tax returns, this new law primarily affects service businesses (doctors, attorneys, accountants, engineers, etc.) - details re: these new requirements.

If you have questions or have received one of these notices and are not sure how to respond please contact our firm.

Decline-in-value review - LA Co Assessor

Beginning in 2010 the LA Co Assessor has new rules for decline-in-value reviews. As you are probably aware, the Assessor will give some homeowners who bought their home at the peak of the market a reduced assessed value to more closely reflect the current value of the property.

On the Assessors website they state that they are reviewing homes purchased between July 1, 2003 and June 30, 2009 to determine if those homes qualify for a decline-in-value reduction on their 2010/2011 tax bill. If your home is reviewed, you will receive the results by mail. By June 30, 2010 you will be able to look up the current assessed value of your home on the Assessor's website.

If you believe the assessed value shown on the current bill (2010/2011)is higher than the current market value you should file an appeal with the Assessment Appeals Board. The forms to do this will not be available until June 1, 2010. If you would like assistance with this process, our office has processed the required forms for many of our clients already and we are very familiar with the rules involved.

One thing to keep in mind about the decline-in-value reduction: it can be changed back to the old assessed value at the Assessor's discretion any time in the future if they determine market values have progressed to that point.

Remember! - don't respond to solicitations you receive in the mail re: the decline-in-value requesting $$$ in order to process the review - its a scam...