Tag: social security

Posted on by Jan Roberg

Helping Mom With Her Taxes: Tax Tips for Preparing Returns for Senior Citizens

If you have an aging parent who is beginning to show signs of Alzheimer's or dementia, it's important to step in and assist with taxes so they don't wind up in trouble with the IRS.

If you have an aging parent who is beginning to show signs of Alzheimer’s or dementia, it’s important to step in and assist with taxes so they don’t wind up in trouble with the IRS.

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If you have elderly parents you may find yourself in the position of having to assist them with their tax returns.  If you have a parent showing any signs of dementia, it’s especially important for you to step in and offer assistance.  Believe me, I understand that there’s a big difference between “offering” assistance and being “allowed” to assist.  Parents can be stubborn, especially about money.  But if your parent is showing signs of Alzheimer’s disease or dementia, you really do need to step in and make sure that their paperwork is taken care of.  Here are some tips to help you make sure you’ve got your bases covered.

 

If your parent has been working with an Enrolled Agent or other tax professional, talk to them first.  They should be able to provide you with a list of all the documents that your parent has used on past returns.  An old return, preferably the most recent one but even one a few years old, will give you a good clue as to what documents your parent usually needs.  Here’s a list of the most common items found on senior tax returns:


1. You need to find the Social Security Statement.  The form is called a 1099SSA.  It should be mailed by January 31.  If you can’t find it after February 1st, you can order a replacement at this web address:  https://secure.ssa.gov/apps6z/i1099/main.html.  It looks like this:

 

 

This sample picture is not in color, but the most distinctive thing about this statement is that it has pink on it.  It comes in one of those envelopes that you have to tear off the sides to open up the paper—the envelope will be white.  It’s not a standard size.

 

The 1099SSA statement is important because for some seniors, their Social Security income is taxable—for others it is not.  It all depends upon how much money they make.

 

Tax Prep Tip:  Use tax software and always input the Social Security income even if it seems obvious that the SS income won’t be taxable.  Software will do the calculation about the tax for you.  And should something turn up later and the IRS contacts you about income that you missed, by reporting the Social Security income even though it wasn’t taxable—you’ve protected yourself from underreporting fines on that income.

 

2. Another statement many seniors receive is the 1099R – for pensions and annuities.  Some seniors won’t have any while others could have 10 or more.  Most seniors will have one or two each—a pension or 401(k) from a job and an IRA.

 

Tax Prep Tip:  Look at box 2 of this statement, often it is blank.  Usually, a blank box means zero, but on a 1099R-a blank box could mean that the company didn’t compute what was taxable.  Many tax software programs will automatically count everything in box 1 as taxable if you leave box 2 blank when inputting the 1099R.  You can test this by looking at line 16a and/or 16b of the 1040 to see if the number carried over there.  On the 1099R form there is a checkbox for “taxable amount not determined”.  If that’s checked, the default is to tax the whole amount.  There are formulas for determining a taxable amount on these types of 1099s.  If you’re dealing with a large pension, it would be worth consulting with an EA to figure the taxability.

 

3.  Investment Income:  Many seniors have investment income.  You’re going to want to look for something called a 1099B, 1099-DIV or a 1099-Combined from.  These come in all kinds of shapes, sizes and colors.  Many seniors have more than one investment firm; just because you find one statement doesn’t mean you have them all.  Many of these firms deliver their statements online.  If your senior parent used to be computer savvy, be sure to check online for these documents.

 

Also seniors, more so than younger investors, tend to hold individual stocks outside of the big investment firms.  Look for individual 1099-DIV statements from Met Life, Pfizer, Ameren and the like.  Many of these statements are still mailed, and they often come in smaller envelopes with the tear off sides.  They should say, “Important Tax Document” on the envelope, but the envelopes do sort of look like junk mail so you may be combing through the recycling bin for these.

 

Tax Prep Tip:  Investment documents aren’t due out until February 15th.  Be sure to allow enough time for all those statements to be delivered before you start your parent’s return.  Some of those brokerage house statements can be over 20 pages long.  While most of the information you need is all on page 2 or 3—there’s a reason they are sending you 20 pages of information.  If you have “gross proceeds from sales of investments” – you need the back 20 pages to determine the basis of that stock sale.  If you have non-taxable dividends from municipal bonds – you need the back 20 pages to determine if that money is taxable to your state.  Brokerage houses don’t send you all that stuff because they hate trees.  If you get a statement like that and you don’t understand it, it’s worth the money to get professional help at least once so you know where everything goes


4.  Bank interest statements.  These are called a 1099-INT.  Seniors are more likely to have CDs than younger taxpayers, and they shop around for the best interest rates.  Don’t be surprised to find multiple bank statements.

 

Tax Prep Tip:  Some banks put all of the CDs and their interest on one combined bank statement.  Other banks send separate statements for each CD—making it look like you’ve just got duplicates of the same statement.  If it looks like you’ve got duplicates—check the account number carefully to make sure you’re reporting everything (and not double counting the same one!)  List the interest earned on each statement as a single line item.  If the bank is sending you statements in separate envelopes, the IRS is also getting that information separately.  If you combine the amounts, it won’t match the IRS numbers and could cause you to get a letter.

 

5.  State programs:  many states have tax credits for senior citizens.  Here in Missouri, we have a property tax credit for low income seniors.  There are programs like that in many other states as well.  Even if your parent’s income is too low to require filing a federal return, be sure to check to see if he or she may qualify for some tax benefit in your state.   You’ll want to keep an eye out for real estate tax receipts or rental income statements.

 

It can be difficult helping a parent at tax time.  Half the battle is knowing what to look for and where to find it.  The harder part is often persuading your parent that she needs help!  But if your parent is confused, especially about financial matters, you need to step in and make sure that her taxes are taken care of now.  It’s much better than having to deal with the IRS on her behalf later.

Posted on by Jan Roberg

How Can Social Security Be Out of Money If We Only Take Out What We Put In?

Photo by Scott at Flickr.com

I hear this question all the time.  We all put our own money into Social Security so how can it run out of money?

 

First, let me point out that Social Security is not out of money.  It’s estimated that it could run out of money by 2035 if changes are not made, but it is not out of money yet.  But, how could it run out of money if it only pays out what we pay in?  The problem is–and I hate to call this a problem, but we’re living too long.  (Like I said, hate to call that a problem.)

 

Let me use a real example of a real person.  I’ll call him Sam.  Over the years, Sam has paid $120,698 into Social Security.  His employers have paid $131,693.  So all together, $252,391 has been paid in.

 

According to Social Security, Sam will receive $2,611 a month in benefits.  At that rate,  Sam basically uses up all his money in just over 8 years.    ($252,391 divided by $2,611  =  96.66 months.  96 months divided by 12 months = 8 years)  So assuming that Sam retires at age 66, if he lives to age 75 then he’s used up all the money put in for him in the first place.

 

But you don’t quit getting social security when it runs out.  Social security payments go on until you die.

 

But what about interest?  Isn’t the money invested, shouldn’t it go farther?

Well yes, I did over simplify things.  The Social Security trust funds are invested in “special issue” securities of the US Treasury.  For 2012, the annual effective interest rate of return was 4.091%.  (But that’s because of some special circumstances, the actual rate right now is closer to 1.48%.)

 

There is no social security withholding on wages over $113,700.  Why can’t the wealthy just contribute more to social security?

I hear that all the time too–why not just have the higher income people keep contributing and eliminate the cap–but here’s a catch–if you are supposed to take out what you put in–then those higher wage earners are going to want to take out what they put in too.  Given that people are living longer than their benefits are holding out–do you really want people taking even higher benefits?  That would actually make the situation worse than it already is.

 

Let’s go back to Sam for our example.  If Sam lives to age 80, that’s 4 extra years of social security.  At his current rate of $31,332 a year, that’s an extra $125,328 more than what he originally paid in.    In reality, Sam earns well above the social security base wage.  Let’s say his contributions to social security are unlimited.   Based upon Sam’s “unlimited” contributions, when I run the numbers, I get Sam’s monthly payment to be close to $7,500 a month ($90,000 a year.)  Now if Sam lives an extra 4 years,   that’s $360,000 more than what he paid in.   So having the wealthy pay in more to social security actually costs more than keeping it capped like it is now.

 

So how do we “fix” social security? I wish I knew the answer to that one, but I don’t.

Posted on by Jan Roberg

Why Social Security Wants You to Retire at 62

Social Security and early retirement

If you are going to life past that age of 83, then Social Security comes out ahead if you take your retirement benefits early.

 

Social Security would rather have you retire at age 62 than at your full retirement age.  That sounds a little backwards, but it’s all about money.  (Of course!)

 

When Social Security started back in 1935, the average person died before ever claiming any benefits.  Now, people are living longer than ever and Social Security payments continue through the end of your lifetime and even beyond for widow(er) benefits.

 

So, if the Social Security Administration is paying out so much money, why would they want you to retire early?   Let’s do the math.  (Don’t worry, I’ll keep it simple.)

 

Frank has worked all his life and he’s tired.  He doesn’t have to, but he’s thinking about retiring at 62 so he can spend more time with his wife, Delores.  If Frank retires at his full retirement age of 66, his monthly Social Security benefit would be $2,000 a month.  If he retires at age 62, he’ll get $1,500 a month.

 

So the first round of math is going to be–how much does Frank get before he ever turns 66?  He’s got 4 years of benefits, 12 months in a year, at $1500.  So he gets $72,000.

 

$1500 per month x 12 months =  $18,000 per year

 

$18,000 per year times 4 years = $72,000 per four years

 

So at first blush, it makes a whole lot of sense for Frank to take the money and run.

 

If Frank waits until he’s 66 to start claiming Social Security benefits, how long would it take for him to make up the $72,000 that he’s lost by waiting?  He’d catch up at age 77.   So if Frank’s family has a history of dying young–it might not make sense for him to wait until he’s 66 to retire.  You can do that math with different numbers, but generally it will take 12 years to catch up to your benefits.

 

But what if Frank comes from a family with an average life expectancy of 90 years?  What then?

 

Remember, by retiring early, Frank loses 25% of his payment every month.  In this case, that amounts to $6,000 a year ($500 a month x 12 months). So if Frank catches up at age 77, then he’s got 13 more years with $6,000 a year extra, now Frank is ahead by $78,000.

 

According to Social Security Statistics, the average person today lives to be 83 years old.  Going by the numbers, Social Security saves money on people claiming their benefits at age 62.

 

This is a very simplified example.  Frank has many things to think about–his wife’s benefits, what if he waits until age 70, how long does he expect to live?  What other benefits might he be entitled to?  Social Security won’t tell you all of your options.  If you call them to file for benefits, they take your application and you’re done.

 

At Roberg Tax Solutions, we’ll sit down with you and chart out your benefits so that you know all of your options.   At the end of the day, the decision is yours, but you deserve to know what all your options are before you have to make that decision.

Posted on by Jan Roberg

How to Check Your Social Security Annual Statement (And Why You Want To, Even if You’re Only 18)

Photo by 401(K) 2012 at Flickr.com

 

“Social Security, that’s for old people.  Social Security won’t even be around when I retire.”

 

Let’s look at that second statement first.  Social Security won’t be around when you retire.  That’s what I was told back in college thirty years ago.  “There will be no more Social Security by the time you retire, you’re just paying in and you’ll get none of it back.”  That was Gospel when I was 20 but Social Security is still here.  We’re still being told doom and gloom stories and granted Social Security is not perfect.  I wouldn’t plan on it being my only source of retirement income—but I suspect that it’s going to be around for a long time so you need to make sure your Social Security records are right.

 

Now I agree that Social Security is mostly for old people, but it also affects your payments should you become disabled and your spouse’s and children’s survivor benefits should you die.  We don’t want those things to happen, but Social Security is there for those situations.

 

The reason you want to check your Social Security statement every year is to make sure that the wages you earned are listed correctly.  Most of the time they’re right but not always.    Usually if there’s a mistake, it happens in a year when you received two or more W2s.  Sometimes they’ll report one or the other but not add them together.  Other mistakes are possible, but that’s the most common one.

 

Here’s why it’s important—Did you know that Social Security uses your top 35 years of wages and self employment to figure your Social Security benefits?  Thirty-five years!  That’s fine if you graduated from college, got a good job, and worked steadily until you retired.  That will give you 35 years and then some, easy.

 

For the rest of us, life happens.  We get laid off, we have babies, and maybe we start our own businesses and have negative income for awhile.  We get some zeroes on our Social Security statement.   Never in a million years would I have dreamed that the $2.50 an hour job I had back in 1976 would affect how much money I’d get for my Social Security retirement benefit.  But it will—because that $2.50 an hour job is better than some of the zeroes that will be affecting my Social Security statement.

 

So how do you go about checking your Social Security statement?  First you’ll need to set up an account with the Social Security Administration.  Go to the website:  www.ssa.gov .  On the left hand side of the screen, you’ll see a picture of a lock and it will say “My Social Security”.  That’s where you’ll create your account, or log in if you already have an account.

 

When you set up your account you’ll need your name (as it appears on your social security card), your social security number, and mailing address.  You have to have a valid email address to set up the account.  You also have to be at least 18 years old, so if you’re only 16 and working, you won’t be able to verify your employment yet.

 

One thing the Social Security website is really good at is security.  They’re going to ask you questions to identify yourself.  Be prepared to freak out a little by how much they know.   The SSA gets the information off of your credit report to generate the questions.

 

Once you’ve got your account set up, you can go in and look at your Social Security Statement.  Here’s a sample one that you can see:  http://www.socialsecurity.gov/myaccount/SSA-7005-OL.pdf

 

Page 2 shows how much your payments would be at retirement, assuming that you continue working at your current income.  It also shows what your disability payments would be if you became disabled today and benefits your spouse or children could receive if you die.  If you haven’t worked long enough to qualify for benefits yet (generally 10 years) it will tell you that too.

 

Page 3 will give you a breakdown of the wages that have been reported over the years.  2012 wages should be posted now.  It’s a slow process; the annual wages that you report on your tax return in April don’t show up on the Social Security Statement until September.  So now’s a good time to check.  If you find a mistake, you’ll need to contact the SSA and notify them.  Usually you’ll need to prove the error by providing them with copies of your W2s.

 

See why it’s a good idea to do this once a year?  Who keeps W2s for 35 years?  (No, I don’t.  You were thinking geeky accountants weren’t you?)

 

Make sure you keep your Social Security user name and password in a safe place.  You’re going to want to access the account once a year and just check the information to make sure it’s accurate.  Labor Day is a good time to check—it’s a celebration of workers, and your Social Security statement is your documentation of your years of working.  (Okay, it’s because the information gets posted in September, but that’s not as easy to remember.)

 

For Labor Day, check your wage history at www.ssa.gov.

Posted on by Jan Roberg

What Every Divorced Woman Needs to Know About Retirement: Social Security

Ex-spouses may claim Social Security based upon their exes' earnings.

If you’re divorced, but were married for more than 10 years to your ex-spouse, you may be able to claim Social Security benefits based upon his income.

 

This may come as a surprise to you, but your ex-husband could turn out to be good for something after all. If you were married for at least 10 years, you may be entitled to Social Security benefits based upon your ex’s income—that is, if he’s entitled to Social Security benefits.

 

Here’s how it works: let’s say you’re thinking about retiring. You go to the Social Security website and find out what your benefits would be if you retire at 62, if you retire at your full benefit age, and if you retire at age 70. Then you call Social Security to find out what your benefits would be if you used your ex’s Social Security benefits. The number is (800) 772-1213. If you retire at 62, you can get 35% of his benefit; at full retirement age, you can get 50% of his benefit.

 

Let me show you with an example: Jane is 60 years old and she’s contemplating what she wants to do about retiring, whether to start taking benefits at 62 or hold out until later. She runs the numbers on the Social Security website ( www.ssa.gov )  and gets the following information:

 

  • Retire at 62, monthly benefit: $ 585
  • Retire at 66, monthly benefit: $ 820
  • Retire at 70, monthly benefit: $1,040

 

Those aren’t great numbers. Jane didn’t always work because she was raising a family, and when she did work, well, she didn’t make all that much money. But Jane’s ex-husband, Tom, made plenty of money. Using the Quick Retirement Calculator at ssa.gov: http://www.socialsecurity.gov/OACT/quickcalc/index.html.

 

Jane estimates Tom’s Social Security earnings will be $2,586 per month at retirement. Now she’s going to want to actually talk to the Social Security folks to get the real numbers, but the calculator will give her a rough idea.

 

So, if Jane retires at 62, she can qualify for 35% of Tom’s money which would be $905 per month. If she waits until her full retirement age, she can qualify for 50% of Tom’s money which would be $1,293. For Jane, she can make more money retiring using Tom’s benefits than she can make on her own.

 

This is really important to know:

  • Your ex-husband will not lose his Social Security benefits if you use them
  • You cannot be currently remarried and qualify for your ex’s benefits
  • If you have had more than one marriage that lasted for over 10 years; you may use the spouse that gives you the greater benefit

 

If you claim Social Security based upon your ex-husband’s benefits before you reach full retirement age you will not be able to switch back to your full benefit at age 70. You really want to think long and hard about those numbers before you retire early.

 

What you’re eligible to receive from Social Security is very personal. It’s all based upon your individual contributions, you can’t make any assumptions based upon what your friends or neighbors get. You can learn what you’re eligible for by creating your own account at the Social Security website. It only takes about 10 minutes. Finding out about benefits from an ex-spouse will take a bit longer because it involves a phone call and the hold times can be pretty long. Isn’t it worth finding out?

Posted on by Jan Roberg

Say Good-Bye to the Payroll Tax Holiday

Barack Obama and Mitt Romney at the second presidential debate—October 16th

Have you been watching the presidential debates?  I have.  I’ve heard both sides trot their “tax plans” out and I’ve heard a lot about what both Governor Romney and President Obama say they’re going to do with taxes if elected.  Here’s something I haven’t heard—what about the payroll tax holiday?

 

What’s that you ask?  The payroll tax holiday is the 2% tax cut we got back in 2011 and it got extended for 2012. Nobody’s talking about protecting it now.  That means you can pretty much expect your taxes to go up starting with your first paycheck in January.   How much?  Well, if you make $30,000 a year and get paid once a month—your pay would go down by $50 per paycheck.

 

Here’s a link to the Kiplinger calculator so that you can figure out exactly how much this will affect you and your paycheck:  http://www.kiplinger.com/tools/Social_Security_payroll_tax_increase_calculator/index.php

 

Full disclosure here:  I thought the payroll tax holiday was a big mistake in the first place.  That’s money that goes into the Social Security fund—you know the one the tax policy wonks keep saying is going to go bankrupt?  So we’ll take money from that fund?  I wasn’t happy with that.

 

But now that everyone has gotten used to that 2% “tax holiday”, when your first paycheck in January comes and it’s a little lighter, you’re certainly going to feel like you’ve had a tax increase, even though technically, it’s not an increase.

 

Seriously, it’s not considered to be a tax increase because it’s an “expired tax reduction.”  And that’s why both sides can say they are not raising taxes—they’re just letting this reduction slide into oblivion.

 

Personally, I’m just not that sophisticated.  I like plain language.  Taxes are going to go up or they’re going to go down, or they’re going to stay the same.  I know that come January, our taxes are going to go up no matter what the politicians call it.

Posted on by Jan Roberg

Is My Social Security Income Taxable?

Do I have to pay tax on Social Security?

Photo by Jan Roberg.

People often ask me if their Social Security income is taxable.  No, sorry, I just lied.  When I finish preparing  a tax return for someone on Social Security I’ll often hear, “What do you mean my Social Security is taxable? ”  People who say that are usually angry when they say it too.  But, for many people, Social Security is taxable.

So how do you tell if your Social Security is going to be taxed?  Here’s the quick and dirty way to figure it out.  First, take half of all of the Social Security income you get and add that to all of the other income you get.  If you’re single and the amount is over $25,000 you’ll start getting hit with tax.  If you’re married filing jointly—then you’ll start getting hit at $32,000.  If you’re married-filing separately and don’t live apart—then it’s all taxable.

So this can totally mess up your tax rates.  For example—let’s say you ‘re currently in the 15% tax bracket and you haven’t crossed into “Taxable Social Security Land” yet, but you’re right on the border.  You want to take a really nice vacation and it’s going to cost you $10,000.  How much money do you need to take out of your IRA to go on vacation and pay the income tax?

Well, you know you need 15% more for the tax so let’s say you take out $12,000.

$12,000 X 15% = 1800

That means that you’ll have $10,200 for your vacation, right?  (12,000 IRA – 1,800 income tax = 10,200 vacation money)

Looks good, except it’s wrong.  See, if you’re on that border, then half of the $12,000 is going to go into the taxable Social Security pile.  So instead of paying 15% on $12,000 you’re paying 15% on $18,000; that’s another $900 in taxes.  ($18,000 X 15% = $2,700    and    $2,700 – $1,800 = $900) 

Now you don’t have enough money to pay for your vacation.  You’ll need to be taking more out of your IRA and then even more of your Social Security will be taxed.

Because taking that distribution makes your Social Security Taxable—your real tax rate is 22.5% instead of 15%.

$2,700 tax divided by $12,000 distribution = 22.5% tax rate

For lots of people, there really isn’t much you can do.   If your income is high enough, you’re stuck with your Social Security being taxed and there’s no way out.   But for some folks—you can plan ahead to avoid this bumped up tax—or at least try to reduce it.  You’ve got to know about the tax though if you’re going to plan ahead for it.  If you want help figuring out if your Social Security is taxable, give us a call.

Posted on by Jan Roberg

Do I Still Have to Pay Taxes After I’m 65?

Cape Horner

Photo by Dietmar Temps at Flickr.com

I need to make this very clear—there is no law that says persons over the age of 65 do not have to pay taxes.

 

But obviously there’s some false information out there because I keep hearing people say they don’t pay taxes because they’re over 65.  What’s worse is that I’m doing back tax returns for senior citizens who are in trouble because they believed that garbage.

 

Granted, things do change when you retire, but if you’re earning income, Uncle Sam wants you to pay taxes on it.

 

Now some people don’t make enough money to be required to file a tax return.  Many of those people are senior citizens.  I think that’s where the rumor about not having to pay started—some people don’t have to file because their income is so low they don‘t owe anything.  But if you’re newly retired, you still need to prepare your tax return to make sure.

 

Here are some things that seniors get into trouble for:

 

Social Security income:  most people think that social security isn’t taxable.  For many people it’s not, but if you have other income, that could kick you into a category where your social security is taxable.  If you’re preparing your own tax return, you need to include the social security income on your tax return.  The computer program will calculate if any part of it is taxed—but if you leave it off, the program can’t help you.

 

Pension income:  once again, many people think that their pensions aren’t taxable.  Many pensions have a portion that isn’t taxable, but a completely nontaxable pension is extremely rare.  Your pension must be reported.

 

Odd job—self employment income:  Often seniors retire from their main job, and they’ll take on a small part-time job someplace just to get out of the house or to help out a friend who owns a business.  They’ll receive a form 1099MISC for the pay.  Under normal circumstances, the income would be small enough that they wouldn’t have to file, but if you have over $400 of self employment income—you’re required to file a return and pay self employment tax.

 

Stock transactions:  Seniors tend to draw from their investments when they retire.  As you draw funds from your mutual fund—you’re selling the shares.  Let’s say you draw $10,000 out of your mutual fund—the IRS will receive information that says you made $10,000 from selling those stocks.  As far as the IRS is concerned—you need to be taxed on that $10,000, plus that will probably kick you into having your social security be taxed as well.  But the truth is, you didn’t make $10,000 on that stock transaction—you may have even lost money—that’s why it’s so important to file your return so the IRS knows you don’t owe as much as they think you do.

 

The biggest problem with not-filing your tax return is that it takes the IRS a few years to catch the problem.  So by the time you get your IRS letter, they’ve already attached a “failure to file” penalty of 25%, and “failure to pay” penalty of up to 25%, and they’ve added interest on top of that.

 

So make sure you file your tax returns after you retire.  I recommend filing every year, even if you don’t owe and even if you’re not required to file.  It protects you from the failure to file penalty in the event the IRS “finds” something later.

 

Bottom line—you’re never too old to pay taxes.