Tag: RMD

Declare the Pennies on Your Eyes

It’s tax season. Clearly, not the most wonderful time of the year. I know that the day I sit down to prepare my income tax return every year is somewhat of a cloudy, rainy day. So I put it off for as long as possible. I think the vast majority of people feel the same way. It’s a real drag getting everything together and organized.

Nevertheless, this month’s blog will be devoted to that subject again, federal income tax. Below are some income tax questions and answers that may apply to your situation. If not, consider yourself fortunate.

1. What is an RMD? And why do I need to know?

An RMD, in the tax world, stands for Required Minimum Distribution. It means that it’s time to pay the piper. Unfortunately, Congress will only let us defer paying our taxes for so long. When we reach a certain age, we are required to withdraw a minimum amount from certain tax-sheltered investments (regular IRAs, for example). Based on your life expectancy, determined by your age and other factors, the IRS sets the minimum amount, which is taxed at ordinary income tax rates. The important thing to remember is that the penalty for missing an RMD is very high. So you don’t want to overlook it.

The beginning date for receiving the first distributions is no later than April 1of the calendar year following the latter of:

• The year you reach age 72 (age 70.5 for those reaching that age before 2020), or
• The year you retire. However, the year you retire criteria does not apply to five percent business owners or IRA owners.

Oh, how much is the penalty? It’s 50%of the RMD not funded. And yes, you still have to pay regular tax at ordinary rates on the RMD.

2. Should I consider funding a Section 529 education savings account?

The short answer is yes. It’s a great way to fund a child’s education. The contributions to the plan grow tax-deferred and, if used for qualified educational expenses, are tax-free when distributed. If a distribution is not used for qualified education expenses, the return on the investment is taxed and is also subject to a 10% penalty.

Contributions to a Section 529 account on behalf of the student must be in cash. Additionally, the amount is limited to the necessary qualified educational expenses determined by the particular plan in which you enroll.

Qualified higher-education expenses include tuition, fees, books, and equipment, such as computers or peripheral equipment, software, and internet access. Room and board costs may also qualify if the student attends at least half-time.

Qualified educational expenses for kindergarten through 12th-grade students include tuition up to $10,000 per year.

The rules in this area can be complicated. So be sure and consult with your tax advisor before setting up a Section 529 Plan.

3. Can I deduct my charitable contributions even though I don’t itemize my deductions anymore?

Maybe. But it’s not a big deduction, and it must be cash contributions. You can deduct $300 of charitable cash contributions ($600 if you file jointly) even if you don’t itemize your deductions.

4. And while we are on the subject of charitable contributions – what about the help you give directly to needy people or family members. Is this tax-deductible?

As well-meaning are those gifts are, that’s as far as it goes. It’s not tax-deductible unless donated to a qualified charitable organization, such as Goodwill or perhaps your church.

Furthermore, not only are the gifts not deductible but depending on the size of the gift, the donor may be subject to federal and (depending on your jurisdiction) state gift tax. So what is the expression –“no good deed goes unpunished?”

5. Ok. Can I get around the above rules by contributing to a qualifying charitable organization (such as a church) where the donation is earmarked to help a specific individual or family?

Again, as well-meaning as that is, it is not tax-deductible as a contribution but is treated as a personal gift. It’s clear under tax law that this does not qualify as a charitable contribution to a qualifying charitable organization. Instead, it is construed as a personal gift to the earmarked needy individual or family because you are directing (or restricting) the charitable organization’s use of the funds.

6. Is my social security taxable?

Maybe yes, and maybe no – it ain’t necessarily so. But for many hard-working Americans, the answer is yes. This is because up to 85% of your social security benefits may be taxable. And the income threshold that triggers the taxability of social security is relatively low.

Taxation of social security became law in 1983. Under the 1983 Act, 50% of social security benefits were subject to income tax if the taxpayer’s total income exceeded certain thresholds. This law used a back-door way of reducing benefits to “higher-income” Americans. Instead of directly reducing benefits, the benefits were paid and then returned to the government coffers via income taxes—a political sleight-of-hand. Furthermore, legislation was passed in 1993 to increase the amount of social security subject to tax to 85%.

A percent of your social security income, up to 85%, may be taxable if:

• 50% of your social security income, plus
• Your total income that is taxable (excluding social security income), plus
• Tax-exempt income,
• Equals or exceeds your base amount.

The base amount is:

• $32,000, if married filing jointly
• $25,000, if single or head of household, or qualifying widow(er),
• $25,000 if married filing separately and live apart from spouse all of 2021,
• $0 if married filing separately, and lived with spouse at any time in 2021

As you can see, the calculations can get a bit convoluted. So, again, it’s a good idea to consult with your tax advisor. Many taxpayers will find that a percentage of their social security benefits will be returned to the U.S. Treasury.

As George Harrison aptly put it in his song Taxman on the Revolver album, “Now my advice for those who die … Declare the pennies on your eyes… And you’re working for no one but me…Taxman.”