Tax Tips Ordinarily, distributions from a qualified retirement plan before age 59½ are subject to a 10% early-withdrawal penalty. But Internal Revenue Code Section 72(t)(A)(v) creates an exception for "distributions . . . made to an employee after separation from service after attainment of age 55. . . ." Unfortunately, this language is ambiguous. Does the exception apply to distributions made after age 55 regardless of when the employee separates from service? Or must the separation from service also occur after age 55? In a recent U.S. Tax Court case, a taxpayer learned the answer the hard way. She retired at age 53 but waited until she turned 55 to take distributions from her employer's qualified plan. The IRS determined she was liable for the 10% penalty, and the court agreed. Sec. 72(t)'s legislative history states that "the exception applies only if the participant has attained age 55 on or before separation from service." (Watson, TC Summ. Op. 2011-113) Charitable trust is a powerful investment tool A charitable remainder trust (CRT) can be an effective estate planning tool. It enables you to remove wealth from your estate, enjoy an immediate charitable income-tax deduction and avoid estate taxes on future appreciation — while continuing to receive income from the trust assets. You transfer securities or other assets to the trust, retaining an annual income stream for life or for a term of up to 20 years. At the end of the term, the remaining assets go to charity. A CRT also allows you to implement investment strategies in a tax-efficient manner. For example, because the trust is tax-exempt, the trustee can sell highly appreciated assets without a capital gains tax bite and reinvest the full amount of the proceeds. Income you receive from the trust is taxable, however. Buying or selling a business? Consider an installment sale In the current economy, many business owners are having trouble finding buyers, while many buyers are having trouble securing needed financing. An installment sale may help both. It expands the pool of potential buyers by reducing their financial burden — essentially by having the seller finance the purchase. And with today's historically low applicable federal rates, a greater portion of the payments the seller receives may be taxed favorably as long-term capital gain rather than unfavorably as interest income. Keep in mind, however, that tax rate increases could make an installment sale more costly. • |