IRA rollovers: Handle with care
Generally, withdrawals from a traditional IRA are taxable, but there’s an exception for “rollovers.” You can withdraw IRA funds tax-free, so long as you reinvest them in the same or another IRA within 60 days. You’re allowed one such rollover in any one-year period.
For years, it was assumed (even in the IRS’s own guidance) that the one-rollover-per-year limit applied separately to each of a taxpayer’s IRAs. For example, a tax-free rollover from “IRA 1” to “IRA 2” wouldn’t prevent a taxpayer from making another tax-free rollover during the same year from IRA 3 to IRA 4. But in a recent decision, which the IRS plans to follow, the U.S. Tax Court held that the rule applies on an aggregate basis. This means that, regardless of how many IRAs you have, you’re limited to one rollover per year.
The Service says it will begin enforcing the rule for rollovers made after Dec. 31, 2014. The one-rollover-per-year rule doesn’t apply to direct transfers from one IRA trustee to another.
Supreme Court: Severance pay is subject to FICA taxes
In U.S. v. Quality Stores, Inc., the U.S. Supreme Court ruled that severance payments to involuntarily terminated employees were taxable wages for FICA purposes, resolving a split among the federal appellate courts. Noting that the severance payments in question were based on employment-related criteria, the Court concluded that they fell within FICA’s broad definition of “wages.”
The Supreme Court observed that IRS rulings provide that severance payments tied to the receipt of state unemployment benefits are exempt from both income tax withholding and FICA taxes. The Court didn’t address this issue, so it seems, at least for now, that employers can avoid FICA taxes on severance payments through a carefully designed severance program that links severance pay to an employee’s receipt of unemployment benefits.
Tax treatment of virtual currency
An increasing number of people are using virtual currency, such as Bitcoin, to pay for goods and services and even to compensate employees. Recently, the IRS issued Notice 2014-21, clarifying the tax treatment of virtual currency. The notice provides that virtual currency is property for federal tax purposes, which has significant implications for users. Among other things, exchanging property for goods or services can trigger capital gains taxes. Suppose, for example, that you buy two bitcoins for $500 each. A year later, bitcoins are trading for $750 and you use your two bitcoins to buy a $1,500 computer. Because your tax basis in the bitcoins is $1,000, you realize a $500 capital gain.
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