There are certain tax situations that may apply to you as an older taxpayer.
It is important to understand the way the tax law affects your return to ensure
you pay the least amount of tax. Learn more about the following to prepare for
an advantageous tax return:
The Standard Deduction
Retirement Plans
Lump Sum Distributions
Tax Credits
Social Security Benefits
Life Insurance Proceeds
Letting Emerald Tax Service Help You
The Standard Deduction
The first area to be aware of is the standard deduction. A standard deduction
is determined by your filing status, age, and vision. For 2004, the standard
deductions are:
Single: $4,750
Married - Filing a Joint Return or Qualifying Widow(er): $9,500
Married - Filing a Separate Return: $4,750
Head of Household: $7,000
If you are age 65 or older and/or blind and your filing status is Single or
Head of Household, add an extra $1,150 (for age and/or for blindness) to your
standard deduction.
If you are age 65 or older and/or blind and your filing status is
Married Filing Jointly, Married Filing Separately, or Qualifying Widow(er),
add an extra $950 (for age and/or for blindness) for each person to
your standard deduction.
You are considered to be age 65 the day prior to your actual birthday
for purposes of the additional amount for taxpayers age 65 and older.
Taxpayers born on January 1, 1939 qualify as age 65 on December 31,
2003.
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Retirement Plans
Generally, after age 59½, you are able to take distributions from your
retirement plan and your IRA without any penalty. Many plans allow you the
option to receive all the funds in one lump sum or roll over all or part of
the funds into an IRA. If you roll over your pension into an IRA, you will
have the ability to control your own investments and to control how much money
you want to withdraw and when.
As long as you are working, you may contribute
to a pension plan. You may not contribute to your traditional IRA
once you reach age
70½, even if you are still working. You may continue to make
contributions to a Roth IRA as long as you are working.
Minimum Required Distributions - Distributions
from pension plans are generally required when you retire or upon
reaching age 70½,
whichever is later. Traditional IRA distributions must begin at age
70½. There are no required distributions for Roth IRAs.
Calculating Distributions - The distribution is based on the value of your
plan (pension plan or all traditional IRAs), and life expectancy. Rules for
life expectancy calculations are simplified, beginning with distributions
required by December 31, 2004.
Lump Sum Distributions
You may be able to elect optional methods of calculating the tax on lump sum
distributions received from qualified retirement plans. If the plan participant
was born before 1936, the 10-year tax option may be available. This option
will generally result in a lower tax on the distribution.
Tax Credits
Dependent Care Expenses - If you or your spouse is unable to care
for yourself and outside care is needed while the other spouse is
working, you may qualify for a tax credit. The credit is based on
a percentage of the amount you pay for care. The maximum credit for
the care of one qualified person is $1,050. The maximum for two or
more qualifying persons is $2,100.
Credit for the Elderly or the Disabled - If you were age 65 or older, or you
were under age 65, you retired on permanent and total disability, and you
received taxable disability income, you may qualify for this credit. If your
total income from all sources, taxable and nontaxable, is below $17,500 ($25,000
if Married Filing Jointly and both spouses qualify, $20,000 if Married Filing
Jointly and only one spouse qualifies, or $12,500 if filing Married Filing
Separately and you lived apart from your spouse for the entire year), you
may be eligible for a tax credit.
Social Security Benefits
If the total of your income plus half of your Social Security benefits is more
than the base amount for your filing status, some of your Social Security benefits
may be taxable. There is a worksheet that must be used to calculate the taxable
amount.
Unlimited earnings from employment are allowed for those who reach
the defined Social Security full retirement age without reducing the
amount of Social Security benefits received. This does not impact
your income tax return directly except that you may receive more Social
Security and therefore have more taxable Social Security income.
Life Insurance Proceeds
Life insurance proceeds paid to you as a named beneficiary are not taxable.
Any earnings from the investment of the proceeds are taxable. Any payments
made to you as the beneficiary of a decedent's employer retirement plan or
an IRA are taxable income to you but, the 10% tax penalty for early withdrawal
is not imposed.
Let Emerald Tax Service Help You
Tax laws can be confusing or just overwhelming. Let the tax professionals at
Emerald Tax Service help you get every dollar you deserve.
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