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FEATURE February 2016 • www.CPAPracticeAdvisor.com 25 Failure to Make Retired Minimum Distributions Do you have any retired clients who are 70 ½ or older, or who turned 70 ½ this year? A quick and easy way to help them save on taxes is to make sure they take their Required Minimum Distributions (R MDs). Failure to do so can result in one of the most puni- tive tax penalties of all–50% of the requ i red a mou nt not w it hd raw n. Remember, the rule does not apply for t hose who ow n less t ha n 5% of a company that they are still working at. You can help your clients avoid this penalty by checking in with them now to remind them about tak ing their R MDs. There are numerous R MD calculators available online that will he lp you de t e r m i ne t he c or re c t amount. You will need your client's previous year-end account balance for all the IRs and pension plans subject to the R MD and their age at year end. A special rule extends the deadline to April 1st for those who turn 70 ½ during the year. If you do happen to have a client who ends up with an R MD penalty you may be able to help them get it waived if you can show "reasonable error" and "reasonable" steps they are taking to correct it. Premature Retirement Plan Distributions One of the most deceiving penalties of all is the penalt y for premature retirement plan distributions. While a client who needs immediate cash may not be deterred when you tell them about this 10% additional tax, it's important that they understand the f u l l i mpac t it m ay h ave on t hei r fnancial situation. Tis penalty hurts your clients not only in the year it applies. Te transaction that caused the penalt y–the early distribution itself–may carry ramifications that extend into your client's retirement because the money is no longer in their account and growing. Many taxpayers who take distribu- tions don't realize that this 10% pen- alty is in addition to their regular tax rate, and that the additional taxable income could push them into a higher tax bracket. It could also trigger the Net Investment Income Tax of 3.8 % and the Additional Medicare Tax of 0.9%. W hile there are numerous excep- t ion s to t he pena lt y–for col lege, medical, insurance, and home pur- chase expenses — a careful reading is required to determine eligibility. For example, one of the trick iest is the exception for medical expenses. Te penalty is waived only on the amount of deductible medical expenses, which is the amount that exceeds either 7.5% or 10% of your client's AGI, depending on their age. In addition, I've seen many ta x- payers take funds from their 401(k)s u nder t he bel ief t h at t here i s a n exception for a frst time home pur- chase. But this exception is only for Individual Retirement Arrangements (also known as Individual Retirement Accounts). You can help your clients avoid this penalty by reminding them each year to call you before making a retirement plan transaction. With a simple calcu- lation you will be able to estimate for them how much tax they will have to pay on the distribution, which will h e l p t h e m t o a t l e a s t m a k e a n informed decision and perhaps decide to explore other options. Failure to File FBAR Your cl ients who have a f inancia l interest or signature authority over a foreign fnancial account that has a total value of $10,000 at any time during the calendar year are required to report the accounts annually to the de pa r t me nt of t he Tre a s u r y v i a FinCEN 114, Report of Foreign Bank and Financial Accounts, formerly called the FBAR. Te penalty for failing to fle this form is $10,000 if the failure to fle is no n -w i l l f u l . Fo r t ho s e w ho a r e deemed to have w illf ully failed to report their accounts, the penalty can be the greater of $10,000 or 50% of each account balance for each year. Many taxpayers are not aware that this penalty applies to foreign gam- bling accounts. You can help your clients avoid this penalty by asking all The Worst Tax Penalties and How to Help Your Clients Avoid Them It is important for us to keep in mind that tax responsibilities are not the frst thing our busy clients are thinking about, and in many cases they are not on their radar at all. A question I continually hear from my clients is, "How do I pay less tax?" But as you know, there is no simple answer to this question. While tax reduction strategies do exist, they are limited for the majority of taxpayers — and they do take some planning and atention. But there is one tax saving approach we can always assist our clients with, and that is educating them about tax penalties. What follows is a list of the most punitive tax penalties along with simple tips on making sure your clients are never faced with them. By Dave DuVal, EA YOU CAN HELP YOUR CLIENTS AVOID THIS PENALTY BY REMINDING THEM EACH YEAR TO CALL YOU BEFORE MAKING A RETIREMENT PLAN TRANSACTION. CONTINUED ON PAGE 34