Glossary of Tax Terms: Roth IRA

A Roth IRA is a type of individual retirement account where deposits into the account are not tax deductible and withdrawals are ID-10022456generally tax-free (with restrictions).

Basic Rules

  • You must have taxable compensation. Compensation is wages and self-employment income. Alimony also counts as compensation.
  • Your adjusted gross income for the year must be less than: $193,000 (in 2015) if your filing status is married filing jointly; $131,000  (in 2015) for single, head of household, or married filing separately (but only if you lived apart from your spouse all year); and $10,000 if your filing status is married filing separately and you lived with your spouse at any time during the year.

Contribution Limits

  • Under age 50: the most you can put into a Roth IRA is $5,500/year
  • Over age 50: the most you can put into a Roth IRA is $6,500/year
  • But you can’t put in more than your taxable compensation. For example, if you taxable compensation is $3,000, then your contribution limit would be $3,000, not $5,500.

Coordination with Traditional IRAs

Many people maintain both a traditional IRA and a Roth IRA. The interaction between the two is:

  • $5,500 (or $6,500, or your taxable compensation) is the total amount you can put into the two accounts. For example, you could put $3,000 into a traditional IRA and $2,500 into a Roth IRA, or any combination as long as it doesn’t exceed your contribution limit for the year.


Withdrawals from a Roth IRA are 100% tax-free if:

  1. The account has been open for at least 5 years AND
  2. The withdrawal is made: after you turn age 59 1/2; or because you become disabled; or is made to a beneficiary; or is for the purchase of a first home

Withdrawals that don’t meet these requirements are taxed in the following way:

  1. Tax-free up to the amount of money you have deposited into the account through the years
  2. Any earnings on the account are taxable and may be subject to the 10% early withdrawal penalty

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Marriage in the Tax Code, Part 14: The Marriage Penalty Gets Worse Through the 1970s

wedding-rings-150300_1280In future parts of this series, I’ll examine the social and legal landscape that may have led to the marriage penalty. But first I want to give some more examples.

By the early 1980s, the marriage penalty started affecting couples at lower income ranges.


In 1982, John has taxable income of $14,000 and Jane has taxable income of $6,000, for combined taxable income on their married filing jointly tax return of $20,000. The tax on $20,000 is $2,773.

If John and Jane were single, John’s tax would be $2,100. Jane’s tax would be $528. Total tax owed between the two of them is $2,628.

Marriage would cost John and Jane would pay an additional $145 in taxes.

For context, $1 in 1982 is equal to approximately $2.38 today. So $14,000 is the equivalent of $33,300 today; $6,000 is the equivalent of $14,300 today; and $145 is the equivalent of $345 today.

In other words, John and Jane face a marriage penalty when their combined income is just $47,000.

Now let’s fast forward to 1988, when new tax brackets took effect after the tax reforms of 1986.

In 1988, John has taxable income of $25,000 and Jane has taxable income of $8,500, for combined taxable income of $33,500. Their total tax liability is $5,513.

If John and Jane were single, John’s tax liability would be $4,680, Jane’s tax liability would be $1,275, for a total tax liability of $5,955. There is no marriage penalty at their income level. For reference, $33,500 of income is equal to $65,000 today. The tax reform of 1986 eliminated the marriage penalty at the lower income levels.

The marriage penalty did still exist, but only at higher income levels. In running projections, I had to up John and Jane’s income to the equivalent of $116,000 in today’s dollars before the marriage penalty applied.

One thing that helped ease the marriage penalty was the fact that the tax brackets were simple in 1988. Here’s what the bracket looked like:

Married Filing Jointly Single
Marginal Tax Brackets Marginal Tax Brackets
Tax Rate Over But Not Over Tax Rate Over But Not Over
15.0% $0 $29,750 15.0% $0 $17,850
28.0% $29,750 28.0% $17,850

But as the years passed, more levels were added back to the tax brackets, and the marriage penalty made a comeback at lower income levels.

Patient-Centered Outcomes Research Fee Due July 31

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It’s that time of year again for certain employers and insurance companies to pay the “Patient Centered Outcomes Research Fee.”

The fee is imposed on health insurance plans, and amounts to $2.08/participant.

In almost all cases for the typical small business that maintains health insurance for its employees, the insurance company will pay the fee and file the necessary forms.

Beware of HRAs

There is one place where small businesses can get caught needing to pay the fee, and that is if the business maintains a health reimbursement arrangement. In that case, the company needs to fill out a Form 720 and write a check to the government for $2.08 per person in the HRA.

Many HRAs are run through sole proprietorships who maintain the HRA for one employee (usually the proprietor’s spouse). But there are no exemptions for small employers.

Even though there’s only one participant in the HRA, the proprietor will still need to fill out Form 720 and pay a $2.08 fee.

The filing and payment are due by July 31st.

I’ve written about this extensively in the past. Here are some links to prior posts.

Who Claims the Kids When a Single Parent Dies Mid-Year? Part 2

Tax situations often turn into complex mazes.
Tax situations often turn into complex mazes.

Here’s the scenario and question I pondered in Part 1:

Husband and wife have 4 kids. The wife passes away. Five years later, the husband unexpectedly dies.

Two of the kids are adults in their 20s, but the other 2 kids are teenagers under the age of 18 and still in high school. The oldest 20-something gets custody of the teens.

In the year the father died, who claims the teens: the deceased father on his final tax return, or the eldest adult child who now has custody?

Analysis: Qualifying Child or Qualifying Relative?

Both of the teens are clearly still qualifying children. They’re under age 19 and still in high school. So, we’re going to look at the qualifying child rules to see what tax law can tell us about this situation.

Qualifying Child: Step-by-Step

Rule 1: The child must be the taxpayer’s child, grandchild, brother or sister.

Advantage: Tie. Both the deceased father and the eldest adult child meet this rule.

Rule 2: Must live with the taxpayer more than 1/2 of the year.

Advantage: It depends. See further discussion below.

Rule 3: The child is under age 19 at the end of the tax year, or under age 24 if a college student.

Advantage: Tie. The teens are under age 18 and still in high school. They clearly meet this rule and it doesn’t play into our analysis.

Rule 4: The child must not provide more than 1/2 of THEIR OWN support.

Advantage: Tie. Note that the rule states that the child cannot provide more than 1/2 of their own support. For our analysis, it doesn’t matter if the deceased father or the eldest child provided more support. Also, for our analysis, assume that the teens didn’t provide more than 1/2 of their own support.

Rule 5: The child is not married.

Advantage: Tie. The teens are not married.

Analysis: It All Comes Down to the Abode Test

The tiebreaker here is, who did the teens live with for more than 1/2 the year. Which means, it depends on when the father died.

If he died in the first half of the year (before July 1st), then he couldn’t claim the teens on his final return because they didn’t live with him more than half the year.

If he died in the last half of the year, then ONLY he would be entitled to claim the teens, because they would have lived with him more than half the year.

When Does Proactive Planning Work?

window-washer-30554I recently wrote a post about accountants providing proactive advice to clients. The point I made in that post is: it’s not nearly as easy to give proactive advice to clients as the “experts” and critics say.

Most business clients the average accountant deals with are Joe the Window Washer types. They want to run their business and mostly be left alone.

But obviously not all clients are Joe the Window Washer. For some clients, proactive planning is not just a “want” but a legitimate need.

Who are those clients?

They Have Staff Doing Most of the Work

Clients who benefit most from proactive planning are those where the owner is not the one in the trenches doing the work every single day. The owner has employees who do the day-to-day work.

If we use Joe the Window Washer: this would be like Joe hiring crews to wash the windows and hiring a foreman to oversee the crews while Joe hangs up his squeegee and doesn’t wash windows himself anymore.

These types of owners have more time to do things such as meet with accountants because they have staff in place to do the day-to-day work of serving customers.

These types of owners probably have more money to spend on making changes because they’re already shelling out thousands of dollars a month in payroll (thus implying that they have positive cash flow).

These types of owners probably are more inclined to change the way the business operates, because they have managers in place to help facilitate the change.

What About the Typical Main-Street Type of Business?

Like I talked about in my first post on this subject, the typical Joe the Window Washer main-street business often neither needs nor wants proactive planning from their accountant — they just want the work done. Usually that means preparing the tax return.

In a few cases, I’ve had success with proactive planning with the Joes of the world. In those cases, Joe decided that he wants to take his business to the next level and he knows it’s going to take an investment of time and money, and he’s willing to make that investment.

More to come in future posts, but I’m curious to know what other accountants and business owners think about this topic. Feel free to leave comments below or send me an e-mail at