You make the callBy: NATP Research
June 13, 2024

Question: Erek made contributions to his Roth IRA in 2020, 2021 and 2022. He later found out his modified AGI was over the limit, so he was not eligible to make the contributions. He withdrew all of them in 2023. How should he report this? Does he need to go back and amend to pay the §4963 6% excise tax?

Answer: For a closed year, like 2020, if Erek had no other changes on his original tax return, he could file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, independently and pay the 6% penalty by using the prior year’s version of the form. No amended return is needed. For 2021 and 2022, which are open years, he could either amend each year to include the prior year’s Form 5329 along with the Form 1040-X, Amended U.S. Individual Income Tax Return, or file it independently to pay the penalty.

To fix it, if Erek withdraws the excess contribution before the income tax return due date, including extensions, he must withdraw the excess contribution plus earnings. Earnings are required to be included in gross income. However, no 6% excise tax applies. Note that earnings from the excess contribution are included in income in the year in which the contribution was made, not in the year when the earnings were withdrawn. However, if he takes out the excess after the due date, he is not required to withdraw the earnings and the 6% excise tax would apply on the excess contribution, excluding the earnings. The penalty will be imposed for each year the excess contribution remains in the IRA until it is removed from the account.

Due to the enactment of the SECURE 2.0 Act of 2022, Erek is exempt from paying the 10% early distribution penalty on the related earnings. However, he is still required to report the earnings as income for the year he makes the distribution or, if withdrawal occurs before the due date, he will report the earnings in the year the excess contribution was made.

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Stay ahead: navigating NOLs and carryforwards strategiesBy: National Association of Tax Professionals
June 12, 2024

Being able to carry net operating losses forward and backward is a significant benefit the tax code provides businesses. However, the process for claiming and substantiating the deduction can be intimidating because there are specific rules that apply, and applying them to a taxpayer’s specific situation can sometimes be complicated.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: What is an NOL?

A: For the tax year in question, a net operating loss (NOL) is defined as the excess of deductions over gross income, subject to certain modifications [§172].

Q: What happens with the NOL in a C corporation when it becomes an S corporation?

A: Generally, the NOL is lost as the unused NOL cannot offset S corporation income and cannot be passed through to the shareholder(s).

Q: Are all NOLs now carried forward since there are no carrybacks?

A: Generally, yes; however, NOLs from farming losses and casualty insurance company losses can be carried back two years.

Q: Going forward, can a taxpayer pick and choose the amount of the NOL to utilize?

A: No, the NOL must be carried to the earliest year allowed, and then successively to the next earliest year, until the loss is used up.

To learn more about navigating net operating losses and carryforwards/backs, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at 

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IRS targeting some CRATs as listed transactions By: National Association of Tax Professionals
June 10, 2024

The IRS has proposed regulations that would classify some charitable remainder annuity trusts (CRATs) as listed transactions. If finalized, the regulations would bar taxpayers from pairing CRATs with single-premium immediate annuities (SPIAs) to avoid recognizing all or a portion of the annuity payments as taxable income or capital gains.

A tax strategy is designated as a listed transaction when the IRS determines it to be the same or substantially similar to types of transactions it considers to be tax avoidance. Taxpayers participating in a listed transaction must disclose additional information to the IRS in the manner described in the regulations classifying the transaction as listed. Additionally, material advisors may be required to disclose information about the transaction to the IRS and keep a list of clients they have advised with respect to it.

What is a CRAT?

CRATs are a type of charitable remainder trust that must satisfy strict requirements under §664. Most CRATs provide annual payments to one or more “private” beneficiaries for either their lifetime or a specified time period. Any funds remaining in the trust when the beneficiary dies or at the end of the specified period are paid to the tax-exempt entity that is the CRAT’s remainderman.

CRATs can offer significant tax benefits to the grantor, who is entitled to a charitable contribution deduction in the year the contribution was made for the present value of the remainder interest to be passed to the tax-exempt entity. Additionally, the grantor does not recognize capital gains on appreciated property transferred into the CRAT. The CRAT itself is usually a tax-exempt entity.

Distributions from the CRAT to private beneficiaries are usually taxed as ordinary income or capital gains under the rules laid out in §664(b). It is these tax obligations that some taxpayers seek to avoid by pairing the CRAT with an SPIA.

What transactions are the IRS targeting?

According to the IRS, the transactions the agency is targeting are those where the grantor creates a trust that purports to qualify as a CRAT under §664. The grantor usually funds the trust with property with a fair market value in excess of its basis, which often includes interests in a closely held business, or assets used or produced in a trade or business. The trust sells the appreciated property and uses some or all of the proceeds to purchase an annuity.

On their federal income tax return, the trust’s beneficiary treats the annuity amount as payable from the trust as an annuity payment under §72, not ordinary income or capital gains, as required under §664(b). Under §72, only the portion of the annuity payment attributed to interest is subject to income tax, with the portion attributed to the principal passing to the recipient tax-free.

The IRS claims that the transaction should not generate any tax benefits for the beneficiary. Instead, the annuity payments should be included in the ordinary income under §664(b)(1) with a one-time amount added to the capital gain under §664(b)(2) when the CRAT sells the property. While promoters of the transaction claim the CRAT received a stepped-up basis in the appreciated property the grantor transferred into the trust, IRS guidance states that it should be characterized as a gift subject to the transferred-basis rules in §1015.

Elements of the listed transaction

According to the proposed regulations, a transaction would be characterized as listed if the participants take the following steps:

  1. A trust purported to qualify as a CRAT under §664 is created by a grantor
  2. The grantor funds the CRAT with contributed property
  3. The contributed property is sold by the trustee
  4. Some or all of the proceeds from the sale are used by the trustee to purchase an annuity
  5. The beneficiary’s federal tax return treats the amounts distributed by the trust, in whole or in part, as annuity payments subject to §72, instead of treating the amounts received by the beneficiary as ordinary income or capital gain under §664.

The tax-exempt organization that is the CRAT’s remainderman would not be treated as a participant in the listed transaction if its only tie to the transaction is its remainder interest.

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