IRAs
Important Changes for 1997
The following changes will not affect your 1996 tax return. They are effective beginning in 1997. For more information on these and other changes to the tax law as they may effect you, contact us.
Contributions to spousal IRAs. For tax years beginning after 1996, in the case of a married couple filing a joint return, up to $2,000 can be contributed to each spouse's IRA, even if one spouse has little or no compensation. This means that the total combined contributions that can be made to both IRAs can be as much as $4,000 for the year. Previously, if one spouse had no compensation or elected to be treated as having no compensation, the total combined contributions to both IRAs could not be more than $2,250. See Spousal IRA, under Contribution Limits, later.
Deduction for contributions to spousal IRA. For tax years beginning after 1996, in the case of a married couple with unequal compensation who file a joint return, the limit on the deductible contributions to the IRA of the spouse with less compensation is the smaller of:
A. $2,000, or
B. The total compensation of both spouses, reduced by any deduction allowed for contributions to IRAs of the spouse with more compensation.
The deduction for contributions to both spouses' IRAs may be further limited if either spouse is covered by an employer retirement plan. See Deduction Limits, later.
No additional tax on early withdrawals for certain medical expenses. Beginning in 1997, the 10% additional tax on premature distributions (early withdrawals) from an IRA will not apply to distributions up to the amount you pay for unreimbursed medical expenses that are more than 7 1/2% of your adjusted gross income.
Also beginning in 1997, the 10% tax may not apply to distributions up to the amount you paid for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all four of the following conditions apply.
1. You lost your job.
2. You received unemployment compensation paid under any Federal or State law for 12 consecutive weeks.
3. The distributions are made during either the year you received the unemployment compensation or the following year.
4. The distributions are made no later than 60 days after you have been re-employed.
Suspension of tax on excess distributions. For IRA distributions made after 1996 and before the year 2000, the 15% tax on excess distributions has been suspended.
New definition of highly compensated employee. Effective for tax years beginning after 1996, a highly compensated employee for purposes of a simplified employee pension (SEP) is any employee who meets either of the following two conditions.
A. The employee owns (or owned last year) more than 5% of the capital or profits interest in the employer (if not a corporation); or more than 5% of the outstanding stock, or more than 5% of the total voting power of all stock, of the employer corporation.
B. The employee's compensation from the employer for last year was more than $80,000 and (if the employer elects to apply this clause for last year) the employee was in the top 20% when ranked on the basis of last year's compensation.
New definition of leased employee. Effective for tax years beginning after 1996, the requirement that a leased employee (for purposes of a simplified employee pension (SEP)) be an individual whose services are of a type historically performed by employees in the recipient employer's field of business is replaced by the requirement that the individual perform services under the primary direction or control of the recipient employer.
Salary reduction arrangement for SEPs repealed. Effective for tax years beginning after 1996, an employer cannot start a simplified employee pension (SEP) that includes a salary reduction arrangement. Only SEPs that allowed employees to choose elective deferrals as of December 31, 1996, can include salary reduction arrangements.
Savings incentive match plans for employees (SIMPLE). Beginning in 1997, certain employers can set up SIMPLE retirement plans. A SIMPLE plan can be set up by an employer who had no more than 100 employees who received at least $5,000 in compensation from the employer last year. Generally, the SIMPLE plan must be the only retirement plan of the employer.
SIMPLE plans are written qualified salary reduction arrangements that allow an employee to elect to reduce his or her compensation by a certain percentage each pay period and have the employer contribute the salary reductions to the SIMPLE plan on behalf of the employee. For 1997, the amount of the employee's salary reductions cannot exceed $6,000. Employers are also required to make contributions to the SIMPLE plan on behalf of eligible employees. Contributions to a SIMPLE plan are not subject to income tax until they are distributed.
A SIMPLE plan can be set up either as an IRA or as part of a qualified cash or deferred arrangement (401(k) plan). SIMPLE plans are not subject to the nondiscrimination rules that generally apply to qualified plans. For more information on this new plan refer to SIMPLE Retirement Plans or contact us.
© Copyright 1997 Raymond S. Kulzick. All rights reserved. 971107.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.