IRS Eases New Reporting Requirements for Small Businesses

I am a happy guy right now. And all of you small business owners should be as well.

For much of the last three days, I have been pouring over new regulations the IRS finalized in 2014 and late 2015 that had all of us tax professionals scrambling and attending tax webinars in the middle of tax season. I have never had to take a tax webinar in the middle of tax season before! The topic was so confusing, the webinar I was just on was FULL! There were even Facebook groups dedicated to nothing but this new set of regulations!

Well, not to worry. The IRS listened to the collective groan of the tax professional community and eased their reporting requirements today. Not only does it save us a lot of time, it avoids a lot of extra expense for many of our clients.

Thanks to the IRS for showing small business just a little bit of love, on Valentines Day Eve. The following is the IRS announcement. OK, back to getting some of these tax returns out the door.

IR-2015-29, Feb. 13, 2015

WASHINGTON —The Internal Revenue Service today made it easier for small business owners to comply with the final tangible property regulations.

Requested by many small businesses and tax professionals, the simplified procedure is available beginning with the 2014 return taxpayers are filling out this tax season. The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014.

Also, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.

“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” said IRS Commissioner John Koskinen. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”

The new simplified procedure is generally available to small businesses, including sole proprietors, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less. Details are in Revenue Procedure 2015-20, posted today on IRS.gov.

The revenue procedure also requests comment on whether the $500 safe-harbor threshold should be raised for businesses that choose to deduct, rather than capitalize, certain capital expenses.

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Scam Alert! “IP PIN” Emails

SCAM alert! Just got this one from a client. This is an email with a Word document attached, supposedly providing them a new Identity Protection PIN. While the IRS does provide some taxpayers an Identity Protection PIN (IP PIN) if they were a victim of fraud, they will never send it through an email, only via regular mail. You should delete any email like this if you receive one.

IP PIN email

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TurboTax in the News Again for Potential Fraud Concerns

Once again, TurboTax has found itself in potential trouble with the Minnesota Department of Revenue for potential fraudulent activity. On February 6, 2015, it posted this notice on their website:

Some Minnesota taxpayers have recently found that when they log in to TurboTax to file their tax return, they see that a return has already been filed. Due to this potentially fraudulent activity, we have stopped accepting tax returns submitted using TurboTax. 

There is a good article from Forbes on this issue as well. TurbTax users, be careful. Identity theft and tax theft is already a big issue. Be careful out there.

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Independent Contractors – How to Classify Workers

NOTE:  This issue has been receiving increased IRS scrutiny in recent years and we expect the trend to accelerate.

One of the steps we recommend to clients who use independent contractors and who
therefore face a heightened risk of a costly IRS payroll tax or benefits audit, is a quick
review of some of the key things the IRS tells its agents to look at in determining
whether a worker is really an employee.

The primary inquiries fall into three categories. Who has financial control of the job?
Who can exercise control over how the worker performs the specific task? And how
do the parties themselves view the relationship? When reviewing the checklist, keep
in mind that the IRS will make its decision based on the whole picture, not just a
single factor.

Workers are more likely to be classified as independent contractors if they:

  • Make a significant investment in business property (a home computer is not significant);
  • Pay their own business expenses;
  • Receive a flat fee that is not based on an hourly or similar rate;
  • Are not prohibited from doing work for other companies;
  • Can pay subcontractors to get the job done;
  • Are not performing services as an integral part of your regular business;
  • Have a contract with an enforceable liquidated damages provision;
  • Can make a profit;
  • Can suffer a loss.

Workers are more likely to be classified as employees if they:

  • Are given specific instructions and on-going training in how to get the work done;
  • Cannot work for others;
  • Have expenses paid by your company;
  • Are paid with a salary or hourly wage;
  • Do not have a significant investment in their trade or business;
  • Are an integral part of your regular business;
  • Receive direct reimbursement for all, or almost all, expenses;

Less important is:

  • Whether or not the work is performed on the business’s premises;
  • Whether the worker has flexibility in setting hours;
  • Whether the relationship is temporary or short-term;
  • Whether the work is full- or part-time;
  • Whether the worker performs services for one or more businesses.

If you suspect from this list that there might be a problem, we would be happy to come in and do an audit of your hiring practices and suggest effective solutions if necessary.

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Reporting Payments Made to Vendors

One of the areas we see the most confusion concerning reporting compliance among businesses is that of reporting payments made to vendors for services performed for the company.

In summary, you are required to prepare a Form 1099 for any:

  • Unincorporated business or individual,
  • To which you have paid $600 or more,
  • For services (cleaning, repair, landscaping, marketing, etc) OR
  • For services combined with providing materials (such as a repairman or building contractor), OR
  • For rent

In general, you do not need to issue a 1099 to a corporation, unless payments were made to a

  • Law firm
  • Lawyer
  • Health care provider

Examples of Situations where 1099 Reporting Is Required

  • You paid rent to an individual or partnership for your business
  • Your business paid over $600 to an individual, sole proprietor, or partnership for services, including parts and materials, (such as cleaning, repairing, remodeling, website design, etc.)
  • You paid over $600 to an attorney or law firm for legal services (even if the law firm is incorporated).
  • You paid over $600 to an individual, sole proprietor, or partnership for services such as accounting, bookkeeping, or consulting.
  • Your business paid over $600 to any individual or business, even if incorporated, for medical or health services.

CAUTION! Because of new 1099-K reporting rules implemented last year for payment made by credit card companies and banks, you should report on Form 1099-MISC only payments you made via cash or check (including electronic checks such as bill-pay checks through your bank). Payments made by credit or debit card should be excluded from your Form 1099-MISC because these payments will be reported on Form 1099-K by the credit card companies and banks.

So how do you know if the business is incorporated or not? This is one of the main purposes of the IRS issued document called a W-9 “Request for Taxpayer Number and Identification.” You should obtain a W-9 from all of your vendors to determine whether they are operating as a sole proprietor, corporation, or partnership, and to obtain their federal Taxpayer Identification Number (TIN).

TIP! Obtain a W-9 from every vendor before paying your vendor. It is much easier to obtain this information up front. It also avoids the last minute scramble when gathering your information for the annual 1099 reporting exercise.

With this information you can determine whether this person should receive a 1099 at the end of the year. It also protects you in the event of an IRS audit. By performing your due diligence with a W-9, you protect yourself if you don’t issue 1099 to a vendor that is not really incorporated. When you obtain a W-9 that states a certain vendor is incorporated, and it turns out the vendor is not (and you should have issued a 1099), you can turn to the W-9 as proof of your due diligence and avoid IRS penalties.

Penalties for failing to file Forms 1099 have risen to $100 per payee statement not filed. This can quickly balloon to a large amount for a business with a large vendor base. Properly issuing 1099s to vendors meeting the reporting requirement also is helpful should your business get audited by the IRS. Failure to issue Forms 1099 can result in
the IRS disallowing the expense claimed on your tax return.

If we are preparing your 1099s for you and we do not do your bookkeeping for you, we will need you to complete a “1099 Worksheet” to organize the data needed to prepare the forms in a timely manner.

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Health Insurance Premium Reimbursements to Employees

There have been some significant changes to what can be done by employers in reimbursing insurance premiums for their employees. In prior years, employers were allowed to either pay for, or reimburse, the cost of employees’ individual healthcare premiums on a tax-free basis. New legislation and guidance provided very late in 2014 from the Department of Labor now prohibits this practice. This is effective for the 2014 tax year and affects any employer with 2 or more employees that does not have a group plan. As a result, if you are an employer reimbursing the premiums for your employees’ individual health care premiums, you must now include this reimbursement as taxable income on the employee’s paychecks and W-2. This income is subject to the normal federal income tax, FICA, Medicare, and state withholdings.

If you have a group health plan, nothing changes; the changes are only for employers that reimburse the cost of individual health plans.

Note: If the employer (including an S-Corporation) has only one participant in a health reimbursement arrangement, the corporation is allowed to reimburse that employee on a tax-free basis as before the ACA rule changes. If that person is a more than 2% shareholder of the S-corporation, the rules still require that the cost of the premiums reimbursed be included in wages in order to allow an above-the-line deduction for the shareholder.  FICA and Medicare need not be charged.

Employers with more than one employee that have traditionally reimbursed their employees on a pre-tax basis for their individual health care premiums must now either (1) eliminate their health benefits entirely, (2) establish group health insurance coverage for their employees, or (3) add an amount for health insurance on their paycheck as regular (taxable) compensation.

Penalties for continuing to reimburse employees on a tax-free basis face severe penalties of $100 per day, per employee.

Health Insurance Premiums Paid to 2% Shareholders

For those S-corporations with group plans or are the only employee of the corporation, the Internal Revenue Service still requires health insurance premiums paid by S-corporations for employees owning more than 2% of the corporation and/or their family members (“2% shareholders”), to be treated as additional wages to the employee. These wages are subject to federal income tax withholding, but exempt from FICA, Medicare and FUTA. If health insurance premiums for 2% shareholders are not included on the shareholder’s W-2, they cannot be deducted on the tax returns.

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Personal Use of Auto

When providing an employee (including shareholder/employees in corporations) the use of a company-provided vehicle, a value representing the personal portion of usage of the vehicle must be included in the employee’s W-2 income. The value computed must be included in the employee’s W-2 as wages and is taxable for federal income tax, FICA, Medicare and FUTA. Although FICA and Medicare withholding is required, federal withholding is not required if notice was provided to the employee of the Company’s decision not to withhold by January 31st.

Click here for more information in our 2014 Year-End Business Guide.

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Closing the Books for Year-End

money-256312_640The year-end closing is a critical part of your annual accounting process. If you are handling your own bookkeeping, here are some things that you can do to help ensure your books are accurate.

  1. Perform a bank reconciliation of all your bank accounts. A bank reconciliation is a process that matches the deposits, checks and other debits you have recorded in your general ledger to what has cleared the bank. This process should be performed monthly as it will identify errors in your accounting records and possibly errors the bank has made.
  2. Reconcile your credit cards to your general ledger. Same process as #1 above except it has to do with your credit cards. This will also ensure you are recording interest expense and haven’t missed any deductions charged to your credit card.
  3. Update your inventory balance. If you are in a business that maintains an inventory of raw materials, work in process, finished products, or goods held for re-sale, be sure to take a physical inventory at year-end, value the inventory at cost (not retail value), and update your general ledger to reflect the amount of inventory you actually have on-hand. You must also keep this list for your records in the event the IRS audits your books.
  4. Record all of your expenses. If you maintain your books on a cash basis (you record an expense when you actually pay for it) this is nothing more than recording all your checks you wrote by the end of the year. A bank reconciliation (#1 above) will help ensure all expenses are captured in your accounting system. If you are an accrual basis taxpayer, be sure you record all amounts you owe your vendors as of the end of the year. This will ensure you are getting credit for all the expenses you are able to deduct. You should also set up a reliable system for recording your out-of-pocket expenses.
  5. Review your outstanding accounts receivable and accounts payable. Be sure to periodically review the outstanding amounts to make sure items aren’t duplicated or otherwise misstated.
  6. Review your fixed asset listing from the prior year.  Are there assets you may have sold? Are there assets you no longer have?
  7. Reconcile all loan balances to year-end loan statements. Not only does this ensure all interest expense is properly accounted for, you could also discover loans that remain on the books but no longer exist because of forgiveness or oversight. Also, make sure all loans are actually recorded on the books. By not recording a loan, you may inadvertently cause yourself to miss an important depreciation deduction as a result of an unrecorded asset.
  8. Set a Closing Date (QuickBooks Users) – Before you send us your QuickBooks data, set a closing date as of the end of the year. This will help prevent making changes to your data after we get it to prepare your tax return. By deleting or adding transactions or otherwise modifying the data in a prior year (including the one you are just closing) you can create extra work for which you may incur additional fees. Because adjustments end up flowing through various balance sheet accounts, changes to prior data will cause other items to be out of balance. When this happens we must identify the changes so we can decide whether you need to amend a prior year return or whether the adjustment belongs in a following year.

By following this list, you will create more accurate books and will save the expense by making the year-end tax return more efficient and effective.

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Year-End Bonuses

Any additional compensation to your employees over and above their standard salary or hourly rates is considered to be taxable compensation. The bonus is considered wages and must be reported as payroll on the employee’s W-2 and is subject to all applicable payroll taxes – federal and state withholding, FICA, Medicare and the related employer taxes.

On your books and records, the bonus is reported as wages on the income statement and it is fully deductible as a valid tax deduction if it is handled this way. Payments to your employees made in cash (and not reported) or recorded as other expenses are not tax deductible, and may cause unforeseen issues if the IRS or state audits your books.

Many employers like to give a flat dollar bonus amount. You can do this by choosing the amount of the bonus you want to hand to your employee and “gross-up” the amount. Most payroll services and payroll software can handle this calculation. By grossing up the flat dollar net amount, you are including the estimated taxes into the amount so that, after taxes, the amount is what you want to provide your employee.

Contact us if you need assistance with this calculation

 

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Standard mileage rates for 2015 announced

The IRS announced that standard mileage rates for use of a vehicle will increase slightly. With gas prices dropping considerably in the last few months, this is great news for business owners.

For business use of a car, van, pickup truck, or panel truck, the 2015 rate will be 57.5 cents per mile, an increase from 56 cents per mile that was in effect for 2014. Driving for medical or  moving purposes may be deducted at 23 cents per mile, one-half cent lower than for 2014.

The rate for service to a charitable organization is unchanged.

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IRS Offers Tips for Year-end Charitable Contributions

charity_donationsIn a news release, IRS has reminded individuals and businesses making year-end charitable contributions of several important tax law provisions and general substantiation requirements that they should keep in mind.

Rules for clothing and household items. To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item (e.g., furniture, furnishings, electronics, appliances, and linens) for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Donors must get a written acknowledgment from the charity for all gifts worth $250 or more, that includes, among other things, a description of the items contributed.

Guidelines for monetary donations. To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement, or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

To help taxpayers plan their holiday-season and year-end giving, IRS offered these additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2014 even if the credit card bill isn’t paid until next year, and checks count for 2014 as long as they are mailed before the end of the year.

• Only donations to qualified organizations are tax-deductible. IRS maintains a searchable online database, Exempt Organization Select Check available at irs.gov, listing most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in the database.

• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. Thus, individuals who choose the standard deduction, including anyone who files a short form (i.e., Form 1040A or 1040EZ), are ineligible to claim the deduction.

• For all donations of property, including clothing and household items, the taxpayer should get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, the taxpayer should keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.

• The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.

• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

 

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IRS Telephone Scam Prevalent in Illinois Now

scamalertOver the years, the IRS has been warning taxpayers and tax professionals about scams where someone calls, allegedly from the IRS, that they had a balance due and needed to pay their balance by a certain date or they would be arrested. There have been several variations over the years. But lately, the scammers seem to be targeting taxpayers in the Midwest. I’ve received several calls from clients reporting this scam and our local police station has issued a warning.

Characteristics of the current scam include:

  • A claim the taxpayer is subject to a review by the criminal investigative branch of the IRS and owes taxes that must be paid immediately to the IRS.
  • Robotic sounding messages
  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

The IRS recommends the following steps should you receive this call:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
  • You can file a complaint using the FTC Complaint Assistant; choose “Other” and then “Imposter Scams.” If the complaint involves someone impersonating the IRS, include the words “IRS Telephone Scam” in the notes.

You can also call your local police station and, of course, call us to help determine if the call is legitimate.

 

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Reimbursement of Individual Health Insurance Premiums No Longer Qualify for Non-Taxable Reimbursement

cancelled_checkOn November 6th, 2014, the Department of Labor issued new guidance that clarifies how the Affordable Care Act is changing the tax treatment for the reimbursement of individual health insurance premiums.

Previous to this new legislation and clarifications, employers were allowed to either pay for, or reimburse, the cost of employees’ individual healthcare premiums on a tax-free basis. The new legislation and last week’s guidance from the Department of Labor now prohibits this practice. This is effective for the 2014 tax year and affects any employer with 2 or more employees that does not have a group plan.  As a result, if you are an employer reimbursing the premiums for your employees’ individual health care premiums, you must now include this reimbursement as taxable income on the employee’s paychecks and W-2. This income is subject to the normal federal income tax, FICA, Medicare, and state withholdings.

If you have a group health plan, nothing changes; the changes are only for employers that reimburse the cost of individual health plans.

Note: If the employer (including an S-Corporation) has only one participant in a health reimbursement arrangement, the corporation is allowed to reimburse that employee on a tax-free basis as before the ACA rule changes. If that person is a more than 2% shareholder of the S-corporation, the rules still require that the cost of the premiums reimbursed be included in wages in order to allow an above-the-line deduction for the shareholder. FICA and Medicate need not be charged.

Employers with more than one employee that have traditionally reimbursed their employees on a pre-tax basis for their individual health care premiums must now either (1) eliminate their health benefits entirely,  (2) establish group health insurance coverage for their employees, or (3) add an amount for health insurance on their paycheck as regular (taxable) compensation.

Penalties for continuing to reimburse employees on a tax-free basis face severe penalties of $100 per day, per employee.

Please let me know if you have any questions regarding this.

 

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Are You Concerned About Filing for an Extension?

april15Are you filing for an extension?  Has time run out to meet the April 15th initial deadline? It’s OK. Really, it is. For some reason, taxpayers get very worried if they, or their preparer, need to file for an extension for any reason. The reason could be valid: you are still missing a K-1 from a company you own, or waiting on a corrected W-2 or 1099 you know you are getting. Or it could be your preparer ran out of time, or you submitted your tax information late. Or maybe, you just plain didn’t get around to doing it yet.

It’s OK to file for an extension. You should pay an estimate of what you think you’ll owe by April 15th to avoid or minimize penalties, but the simple act of filing for an extension to allow for an additional few days or few months to file should not cause a lot of stress and consternation. The IRS automatically accepts your extension request. They don’t even ask for a reason. Honestly I’m not sure why they don’t just make the filing deadline October 15th, but I guess they have to get people going somehow. Otherwise everyone would wait until September and October to file.

This is a link to an AICPA guide to frequently asked questions about extensions. It reviews several of the concerns and questions people have about extensions. Here are a couple of myths I hear circulating about extensions.

The IRS charges a fee: FALSE. I have heard this many times and even heard that “the IRS charges $75 to extend your return”. This is not true. Your CPA may charge a fee of you brought in your information late and they need to do a special calculation to find out how much you should pay, but the IRS does not charge a fee.

It increases your chances of getting audited: FALSE. There is no evidence this is true. In fact I’ve heard others claim your audit chances are smaller, but that is is speculation. I can say that of all the IRS audits I have ever seen or heard about, not one was the result of extending your return. In fact, I have personally extended my personal and business returns for a very long time with no repercussions.

My return won’t get filed until October: FALSE. If your CPA or tax preparer is extending your return, it may mean only a week or two delay in getting your return completed. I’ve had clients tell me when their preparer extended them it meant an additional 6 month wait. This should not be the case; the extension allows for 6 months additional time but it doesn’t mean you have to take all 6 months to get the return filed.

So, if you need to file for an extension, don’t worry about it. If your preparer is extending your return, it may mean an additional week or two. But that’s not a bad thing: it allows your preparer to work on your return in a more sane atmosphere, spend more time on your return and possibly make it more accurate or find ways to lower your tax bill.

 

 

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IRS Reminder: April 1 is Key Date for Taxpayers with IRAs and Qualified Plans

In a news release, IRS has reminded taxpayers who turned 70 1/2 during 2013 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans (i.e., 401(k), 403(b), and 457 plans) by Apr. 1, 2014.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by December 31. So, for example, a taxpayer who turned 70 1/2 in 2013 and receives the first required payment on Apr. 1, 2014 must still receive the second RMD by Dec. 31, 2014.

Affected taxpayers who turned 70 1/2 during 2013 must figure the RMD for the first year using their life expectancy on Dec. 31, 2013 and their account balance on Dec. 31, 2012 (reported by the trustee to the IRA owner on Form 5498). Most taxpayers use Table III (Uniform Lifetime) of Publication 590 to figure their RMD. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions.

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