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journalist instigators on tax effects of stock market drop

I read two articles recently from leading news organizations that seemed primarily designed to incite unhappiness and resentment. As a result of these and similar articles, I fear in the upcoming tax season that some tax clients may need extra consolation for no good reason.

1) taxpayers required to take RMD's from IRA's based on a 12/31/2007 balance that is much higher than at present.

2) year-end capital gains distributions due to fund managers conducting ordinary business in addition to meeting extraordinary withdrawal requests.

In both cases, the thrust of the article was that somehow insult (tax) was being added to injury (decline in market value), but I just don't see it -- am I missing something?

In case (1), leaving aside the issue why someone in their late 70's or

80's would have significant exposure to the stock market in the first place, my response is, so what? Just because they have a RMD doesn't mean they have to spend it, they can turn right around and immediately re-invest in the same security (in the rare event there was "loss", wash sale rule would not apply, since basis was always zero). In fact, wouldn't this be better anyway? Unlike stocks in a Trad. IRA, ordinary investment in stocks will either be taxed in the future at favorable capital gains rates or inherited at stepped up basis. Why not go for it, and withdraw *more* than the RMD, up to the next tax bracket?

In case (2), I'd be *glad* some of my gains were locked in as the market was descending. I'd offer to reimburse anyone for the additional tax they paid (up to 100%) if they will give me the remainder of the capital gains distribution they are being told to be unhappy about receiving.

-Mark Bole

Reply to
Mark Bole
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Or just take an in-kind distribution. No need to sell the stock, take cash, and buy it back.

Joe

Reply to
JoeTaxpayer

"Mark Bole" wrote

Nope. It's happened before. No need to fret about it though. Blame the Republicans or the Democrats. Either way the client will think it's your fault that you can't "Fix it!!"

Maybe I'm missing your point here. The distribution is taxable to them. A reinvestment can't change that.

Maybe you're trying to brighten their spirits in that they can now "buy low" and maybe recoup their "losses" in some future year. Some how I doubt that'll fly well, especially after you give them a bill.

At best, if the qualified account has a long investment history, you can remind them that their account is still greater than the sum of their contribution (maybe be sure of that fact before proclaiming it as such) as it probably is if they have made investments over 10, 15, 20 years or more.

Both positions are up in the air right now. I seriously doubt the Dems will leave the capital gains rate where it is. At best it'll bump up to ordinary income rates. At worse it'll be higher.

Likewise, if they eliminate the estate tax, there would be no step up in basis. I'm not sure about their position on the estate tax.

That sould always be a consideration. And maybe for this year and hopefully next, even more, before the rates go up in 2010.

For sure 2009 will be an interesting and profitable year in the financial plannning / tax planning industry.

Reply to
Paul Thomas, CPA

What happens if he was really unlucky and the RMD exceeds the full balance?

Seth

Reply to
Seth

Then take a distribution from any other traditional IRA account.

If there's still not enough, well, you can't get blood from a stone.

I would attach a statement, perhaps form 8275, explaining that the total balance of your traditional IRAs is zero after the distribution, and that distribution wasn't even enough to cover the RMD.

Since almost nobody looks at 8275s or statements, expect to get an IRS nastygram, and then repeat this information, pointing out that had they read the 8275 they would have lrealized why the RMD could not be met.

Note: For someone age 70 1/2, the value of the account would have had to decline about 96%, which I suppose is more than possible these days.

Reply to
Arthur Kamlet

My point was, the fact that they might wait to the end of the year instead of the beginning of the year to take their RMD doesn't really change anything. The amount of the 2008 RMD was locked in on

12/31/2007, what happened to the IRA balance after that is irrelevant for 2008 tax year.

However the article was somehow trying to portray a different picture. Maybe they got bad advice that leaving their RMD invested in the stock market for an extra 11 or 12 months was always a good idea with no downside risk, but that's not a flaw of the tax system, IMO.

-Mark Bole

Reply to
Mark Bole

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