(AGI). For those who file as in- dividual or head-of-household, the phaseout range is $118,000- $133,000 AGI. If your AGI is above the top end of the range, you can’t contribute anything to a Roth IRA. I’ve met several retired officers who were surprised when they plugged the numbers into their tax software and realized they had a problem. If this happens to you, you must
take action or be subject to a 6-per- cent excise tax on the ineligible contribution remaining in your Roth IRA. To rectify this problem, you must withdraw the ineligible contribution on or before the due date (including extensions) for fil- ing your tax return. You also must withdraw any earnings on the in- eligible contribution and pay taxes on the earnings received in the year the excess contribution was made.
Trap No. 3: Overstating your income
To the IRS, it is just as wrong to over- state your income as it is to understate it. Many military officers acquire rent- al real estate holdings as they progress through their careers. Some get a little lazy and decide not to calculate and deduct depreciation. This results in an overstatement of income. The likelihood of getting audited — and, more important, penalized — for
this decision is low. However, when you sell a house, you are required to report “1250 gains.” For those of us who don’t speak tax code, 1250 gains commonly are called depreciation recapture. Here is the kicker: You are required to pay taxes on the deprecia- tion you took (or should have taken), assuming you sell the property for more than your adjusted basis. This uncomfortable situation can
be corrected by filing IRS Form 3115, which is used for a change in account- ing system. You must complete the form to change from your unauthor- ized accounting system (not taking depreciation) to an authorized ac- counting system (one that depreciates the residential real property, excluding the value of the land, over 27½ years).
Trap No. 4: Sixty-day rollovers (again)
If you decide to do a 60-day rollover from your Thrift Savings Plan (TSP) or another qualified account such as a 401(k) or 403(b), you’ll prob- ably be surprised when you receive a check for only 80 percent of the distribution. This occurs because the custodian of the account is required to withhold 20 percent in taxes from the distribution, just in case you don’t complete the rollover. Let’s assume you have $100,000
in your TSP account when you leave the military. You decide you want to
do a 60-day rollover from your TSP to your IRA. When the check arrives in the mail, you receive $80,000, due to the $20,000 tax withholding. You deposit the $80,000 into your IRA. Much to your surprise, when you file your tax return for the year involved, you don’t get $20,000 back. Instead, you receive $13,000. This is infuriating, so you call the IRS — and discover even though you only received $80,000, the tax- able amount of your distribution was $100,000. To avoid owing taxes on the distribution, you should have withdrawn $20,000 from some other source to deposit into your IRA. Since you didn’t do this, you had a $20,000 distribution sub- ject to tax and penalty ($20,000 x 25-percent assumed tax rate + $20,000 x 10-percent penalty). The IRS will continue to enforce
the tax law and develop new and dif- ferent ways to do it. And unlike the Road Runner, you can’t rely on its in- competence to avoid getting caught.
MO
— Col. Curt Sheldon, USAF (Ret), CFP®, EA, owns a tax and financial planning business that serves current and previous servicemembers. His last feature article for Military Officer was “Taxpayer Beware,” February 2016.
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