Tax Tips: IRS Announces Transition Rule for IRA Rollovers

An IRA rollover allows you to withdraw IRA funds tax-free, provided you reinvest the funds in the same or another IRA within 60 days. You’re allowed one rollover in any one-year period.

Until recently, it was generally agreed that the one-rollover-per-year limit applied separately to each of a taxpayer’s IRAs. But in a 2014 decision, the U.S. Tax Court held that the rule applies on an aggregate basis. In other words, you can’t make more than one tax-free 60-day rollover in a one-year period, even if the rollovers involve different IRAs.

The rule took effect on Jan. 1, 2015, but the IRS established a transition rule for 2015. In Announcement 2014-32, the IRS said that, in determining whether a 2015 distribution can be rolled over tax-free, it will disregard 2014 rollovers that involved different IRAs.

For example, suppose you have two IRAs, IRA 1 and IRA 2, and that you took a distribution from IRA 1 in July 2014 and returned the same amount to IRA 1 in August 2014. Under the transition rule, you can take a tax-free distribution from IRA 2 in June 2015, provided you roll it back into IRA 2 (or into a third IRA) within 60 days.

Are government settlement payments deductible?

Generally, legal settlements paid by your business are tax deductible as ordinary and necessary business expenses, but government fines and penalties aren’t deductible. If you’re involved in settlement negotiations with a government agency, ask for a provision in the settlement agreement characterizing your payments for tax purposes. To the extent your payments can be characterized as compensatory damages rather than fines or penalties, you’ll enjoy tax deductions that can soften the financial impact.

Health care: Watch out for “skinny” plans

Employers subject to the shared-responsibility provision of the Affordable Care Act are required to offer employees “minimum essential health coverage” or risk a tax penalty. To meet this requirement, many employers are considering so-called “skinny” plans. These low-cost plans satisfy the basic requirements for minimum essential coverage but provide little or no coverage for in-patient hospitalization services or physician services. Although these plans appear to be allowed by current regulations, the IRS is expected to issue proposed regs that would prohibit this strategy — and may have done so by the time you’re reading this. Check with your tax advisor for the latest information.

Under the proposal, a health plan that excludes substantial coverage for in-patient hospitalization or physician services (or both) won’t comply with ACA requirements, exposing an employer to penalties.

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