Posted on February 21, 2011May 31, 2016 by Jan Roberg

Senior Small Business Owners: A Nice Surprise from the IRS

No clowning around: Medicare Part B can be used for the self-employed health insurance deduction.

Let’s be real, how often do you get to hear the words “surprise” “IRS” and “nice” in the same sentence? I know it’s rare, but a nice surprise is exactly what senior citizen small business owners are getting this year from the IRS. For 2010, your Medicare payment counts towards the self-employed health insurance deduction.

This is brand new. So new in fact, that people don’t seem to know where this new rule came from. In the past, Medicare payments were never allowed to be used for the self-employed health insurance deduction. The rule is not in the Small Business bill that was passed earlier this year, and it doesn’t seem to be hidden in the numerous pages of the health care bill either.

So where can you find this new mystery tax ruling? It’s right in the 2010 instruction book for the 1040 tax form. It says: Medicare Part B premiums can be used to figure the deduction. …For more details, see Pub. 535

Now if you go to Publication 535, you’ll find it says: Medicare Part B premiums are not considered medical insurance premiums for purposes of the self-employed health insurance deduction.

Oopsies! But according to the IRS, a new Publication 535 is being produced and it will say that you can make the deduction.

So what’s it worth to you? Depending upon your tax bracket – a few hundred dollars! The average Medicare Part B premium is about $1200. For 2010 only, you can use that $1200 to reduce your self-employment tax which would save you about $180. Additionally, you’d reduce your regular taxable income by $1200 so you’d save even more.

Should you be worried about the conflicting rules? No. According to the IRS, the 1040 instructions are the rule to use. I don’t expect this rule to stick around for next year, but enjoy the gift while you’ve got it.

Posted on February 4, 2011May 31, 2016 by Jan Roberg

Missouri Seniors May Want to File Separately

If you’re married and receiving a public pension or social security in Missouri, it may make sense for you to file your tax return as married filing separately instead of jointly. It sort of defies the conventional wisdom of tax preparation, but it’s worth checking out.

Usually, as in 99.5% of the time, a married couple is better off filing a joint return, at least as far as their federal tax return is concerned. But often times, especially when there are no dependents claimed on the return, the difference is negligible if anything. It’s just natural to file a tax return jointly because it’s easier and usually cost effective. But most tax software programs that do a “married filing jointly (MFJ) vs married filing separately (MFS)” comparison analysis usually don’t include the state results in the analysis.

If you live in Missouri, and you both have a public pension, you’ll want to take a closer look at the potential difference. Here’s why: If you’re married and your combined income exceeds $100,000, your public pension exemption becomes limited. If you change your status to MFS, you each are allowed income of $85,000 before any limitations kick in. The higher your income, the more you’re going to want to consider splitting your return. Now remember, this works for public pensions and social security, if you have a private pension, the rules are different and there’s no tax benefit to filing separately.

Public pensions are pensions from government organizations such as the military, the postal service, or state or local governments. Teacher pensions are considered to be public pensions. Private pensions are from corporations like Boeing or Nestle. If you’re not sure what kind of pension you have, call your plan administrator.

Let’s say for example that you and your wife are retired school teachers–meaning that you both have public pensions. Your income is $70,000 and your wifes’ is $74,000. Combined, you’re well above the $100,000 limitation. Because you’ve exceeded the income limitation, your pension exemption is limited to $23,406. If you filed separately, the income limitation would be $85,000–which you’d both be under, and you’d each get a pension exemption for $33,703 (or a total of $67,406.) That’s a difference of $44,000! Compute that out at the 6% tax rate for Missouri and you’ll have saved $2,610.

That’s a big difference. Using the standard “MFJ vs MFS” calculator for the federal return, I showed that with the married filing separately status, you’d owe an extra $12. I’ll gladly pay $12 to save $2600. But without doing the extra work, I wouldn’t have known there was that huge difference.

While the take home tax software products are really good, this is one of those situations where you can miss out on a major tax savings. You have to know about the public pension exemption. You have to know about the different income limitations. And most importantly, you have to actively set up and do the work to make sure you don’t miss this opportunity. If you think you might be missing out on important deductions like this one, maybe it’s time to set up an appointment with a professional.

Posted on February 2, 2011May 31, 2016 by Jan Roberg

Tax Tips for Senior Citizens

This year seems to be the year that seniors are getting slammed from all sides. First, there was no increase in Social Security benefits, but the Medicare premium they had to pay was increased leaving them with smaller checks. Last year we had a brief, additional federal tax deduction for real estate taxes which was specially designed to help senior home owners, but that was eliminated for this year.

Here in Missouri, the state recently ended the Historic Preservation Credit, which helped control senior’s real estate tax bills. And right now they’re trying to end the popular Property Tax Credit for seniors who rent instead of own their homes. (Some seniors have already felt the bite of this as the credit is now denied to seniors of subsidized housing.)

So instead of just harping on bad news, what are some tax tips and strategies that are available to senior citizens? First, even if you don’t make enough income to be required to file, file a federal return anyway. Why? Two reasons, the first is that you’re on the radar in the event the government offers some sort of tax rebate or credit for senior citizens. Many seniors missed out on the $250 rebate a few years ago just by not filing. Second, and this is probably even more important, is that if you file a return, there’s a statute of limitations where the IRS can’t come back after you for more money. If you don’t file a return, there is no statute of limitations. I’ve had to deal with seniors who now have tax liens on their homes because they didn’t file a return and the IRS came up with something years later. Had a timely return been filed, the IRS would have been too late to make the claim.

Another important strategy for seniors is planning their income. Depending upon your marital status, your social security becomes taxable once you reach a certain income. You don’t have much choice about how much you receive for your pension, and you’re required to take your minimum required distribution from your IRAs, but you have a lot of flexibility elsewhere. Right now, during the early part of 2011 is a good time to plot out your strategy for your next year’s tax return. If you’re anywhere near the borderline on taxable social security, planning is absolutely essential. Some strategies include: moving assets to a tax free munincipal bond fund, using the charitable donation option on your IRS to use your required minimum distribution, and selling stocks that have lost value to offset your capital gains.

A flip side strategy for some seniors would be if you’re already in a situation where 85% of your social security is going to be taxed, go ahead and do even more taxable transactions. This sounds crazy coming from me as I’m always trying to defer income and taxes, but hear me out. When you’re in the “taxable social security zone”, you’re really paying a double tax. If you’re in the 15% tax bracket, then you’re really paying 30% because that social security wasn’t taxable until you hit the zone. If you’re pushed into the 25% tax bracket, that extra income is really taxed at 50%. 50%! So, let’s say you have a year where you’ve already reached the point where 85% of your social security is going to be taxed. Once you’ve crossed that line, the IRS can’t tax anymore of your social security for that year, the remaining tax will be at the regular rate (25, 28 or 32% so it’s a tax reduction now.) It might just make sense to go ahead and do that extra income transaction now, if it will keep you from having to be in the extra tax zone next year. It’s really going to depend upon your individual situation

Posted on December 20, 2010June 7, 2018 by Jan Roberg

Qualified Charitable Distributions

If you are over 70 and 1/2, you may be able to take advantage of a Qualified Charitable Distribution.

UPDATED FOR 2018

The Qualified Charitable Distribution (also known as a Charitable IRA Rollover) is is a great strategy for seniors to reduce their taxable income under the new tax code.

What is a Qualified Charitable Distribution (or QCD)? If you’re 70 and 1/2 or older, you’re required to make required minimum distributions (RMDs) from your Individual Retirement Account (IRA.) Even if you don’t need the money, you have to take it out of your retirement account and you have to pay tax on it. If you don’t, the penalties are even worse than any tax you’d have to pay. Additionally, many seniors don’t get the benefit of claiming their charitable donations on their income tax returns because they don’t have enough other things to deduct like mortgage interest. With the new, higher standard deduction for 2018, even fewer seniors will be able to itemize their deductions.

The Qualified Charitable Distribution helps with this problem by allowing you to take money out of your IRA and make a direct contribution to a charity. The distribution counts towards your RMD and it’s tax free to you because it went to the charity. That’s a win/win situation!

Another advantage to the QCD is that the income from the distribution never shows up as income on the face of your tax return. This is really helpful for people who may be able to claim other deductions or benefits based on having a lower Adjusted Gross Income (or AGI.) For example: The taxability of your Social Security income is based upon your AGI, so for some people, a lower AGI could reduce how much of their Social Security income gets taxed.

Can you make a contribution for more than your RMD? Yes you can. You can actually make a charitable distribution of up to $100,000 from your IRA with no federal income tax impact. $100,000 – that wasn’t a typo. If you’re in a financial position to make a donation like this, that would be $100,000 to a charity of your choice with no limitations as to its deductibility because it’s part of an IRA charitable rollover.

Can you make a QCD if you’re less than 70 and 1/2 years old? No, I’m afraid not. You must be at least 70 and 1/2 at the time you make the distribution.

If you’re interested in making a Qualified Charitable Distribution, talk it over with your financial advisor and your charity. You’ll want to make sure that it’s done correctly and you’ll want to keep good records in case there’s ever any question about your RMDs.

Can I still take a charitable deduction on my tax return for my QCD? No, the QCD will be exempt from tax so you can’t claim it as an additional deduction.

The Qualified Charitable Deduction is one of the best ways for seniors to reduce their tax liability under the new tax code. If charitable donations are something you do, then definitely check out the QCD.