The Super Bowl is over and baseball season hasn't yet begun, so you know what that means -- it's tax time! Hold the groans, please. Maybe you thought your tax prep would get less complicated once you stopped working, but preparing taxes in retirement can be quirky.
First the good news: Uncle Sam is giving everyone two extra days to file. Taxpayers will have until Tuesday, April 17, to file their returns because April 15 falls on a Sunday, and Monday, April 16, is Emancipation Day, a Washington DC holiday.
I field many questions about the taxation of retirement accounts, so let's start there. When you turn 70 1/2, you must take Required Minimum Distributions (RMDs) from retirement accounts (other than Roth IRAs). The rules for this are very IRS-esque, which means they are confusing. You must begin withdrawing funds from your retirement accounts by April 1 of the year following the year in which you turn age 70 1/2. For all subsequent years, including the first RMD year, you have to take your distribution by December 31.
RMDs exist for a very simple reason: Uncle Sam wants his money. Your retirement contributions haven't been taxed, so the government is anxious to take its share. So anxious, in fact, that failure to take your RMD can result in a serious penalty -- a 50 percent tax levied on the amount not withdrawn -- ouch!
How do you calculate your RMD? For many, the answer is "who cares?" because brokerage firms, IRA custodians and retirement plan administrators usually calculate the RMD for you. Still, the IRS reminds us that "the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD." To double-check the math, take the December 31 balance of your IRA or retirement plan account and divide it by your life expectancy factor, found in the ever-fascinating IRS Publication 590.
If you have multiple IRA accounts, you can calculate the RMD separately for each one, but you can withdraw the total amount from just one. Note that if you never rolled over your 401(k) or 457(b) plans, you will have to take your RMD separately from each of those plan accounts.
Next it's time to consider potential taxation of Social Security benefits if you have other income from part-time work, or taxable interest and dividend income. Here's how it works: If you are single and your "combined income" (your adjusted gross income + nontaxable interest + 1/2 of your Social Security benefits) is more than $34,000, up to 85 percent of your benefits may be taxable. If you are married filing jointly, and your combined income is more than $44,000, up to 85 percent of your benefits may be taxable. No one pays federal income tax on more than 85 percent of Social Security benefits. If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld.
Some other things to keep on your tax prep list:
-- The Credit for the Elderly or the Disabled is a credit for people age 65 and older, or people under 65 who are retired on total disability or receving taxable disability income. Check IRS Publication 524 to see if you qualify.
-- If you itemize your deductions, you may be able to claim a deduction for medical expenses. You can only deduct the portion of your 2011 medical expenses that exceed 7.5 percent of your adjusted gross income (IRS Publication 502). You can also include amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts.
Although it's easy to beat up on the IRS, let me plug the government's searchable and easy-to-navigate website, www.irs.gov. For both the layman and the tax pro, it's the definitive source. Finally, remember that while tax time is onerous, at least it only happens once a year ... and "pitchers and catchers" are just around the corner!
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