Age-Related Tax Milestones
As a Tax Preparation Miami Firm we know that across economic cycles, two things remain constant: you get older and you pay taxes. As the new year turns, you should also turn to your own age-related tax and financial planning milestones before your Income tax preparation in Miami.
Age 0-23: Beware the Kiddie Tax
As a Tax Preparer Miami I warn clients that under the Kiddie Tax rules, part of a young person’s investment income can be taxed at the parent’s federal rate. This means investment income for a young person, which would be taxed anywhere from 0% to 10% to 15%, could be taxed at rates up to 35%.
The Kiddie Tax can bite until the year when the person turns 24. After the year the young person turns 18, however, the Kiddie Tax can only bite if he or she is a student with at least five months of full-time school attendance, according to Tax Preparation Miami firm VieraCPA.
For 2011 and 2012, the Kiddie Tax can only bite investment income in excess of the threshold amount of $1,900 (the threshold is adjusted for inflation every few years). Investment income below the threshold is taxed at the young person’s lower rate. Consult our Income tax preparation in Miami firm prior to filing.
Age 18 or 21: Custodial Account Reverts to Child’s Control
According to Tax Preparer Miami VieraCPA, if you’ve set up a custodial account for a minor child, that account comes under the child’s legal control when he or she reaches the age of majority under applicable state law (usually 18 or 21). That means the child can drain what was supposed to be a college account to buy a red Corvette, tattoos, and cigarettes. Not good!
Age 50: Extra Retirement Account Contributions Allowed
Those who are 50 and older at year-end can make additional catch-up contributions to 401(k) plans (up to $5,500 for 2012). Tax Preparation Miami points to Section 403(b) tax deferred annuity plans (up to $5,500), governmental Section 457 plans (up to $5,500), and SIMPLE plans (up to $2,500).
You can also make an additional catch-up contribution of up to $1,000 to a traditional IRA or Roth IRA for both 2011 and 2012. In fact, you have until 4/17/12 to make an extra contribution for the 2011 tax year if you are 50 or older as of 12/31/11. Make sure you plan accordingly before your Income tax preparation in Miami meeting.
Age 55 and 59.5: Penalty-Free Retirement Account Withdrawals Allowed
After age 55, you can receive penalty-free pay-outs from your former employer’s qualified retirement plan(s) without getting hit with the 10% premature withdrawal penalty tax that usually applies to pay-outs received before age 59.5. Tax Preparer Miami CPA Gustavo Viera notes that to qualify for this penalty exception, you must have permanently left your job (it doesn’t matter why).
After reaching 59.5, you can receive penalty-free pay-outs from any plan (including one run by your current employer) and from your IRAs.
Beware: Penalty-free pay-outs still count as taxable income.
Age 62: Start Date for Reduced Social Security Benefits
You can start receiving Social Security benefits at age 62, but they will be lower than if you wait until you hit the current full-retirement age of 66 (for those born between 1943 and 1954). According to Tax Preparation Miami CPA’s if you work before reaching age 66, your benefits will be further reduced if your 2012 earnings exceed $14,640. Beware: depending on your income from other sources, up to 85% of your benefits may be subject to federal income tax.
Age 66: Start Date for Full Social Security Benefits
If you were born between 1943 and 1954, you become entitled to full Social Security benefits at age 66. You won’t lose any benefits if you work in years after the year you turn 66. However if you turn 66 in 2012, your 2012 benefits will be reduced if your 2012 earnings from working exceed $38,880. Beware: depending on your income from other sources, up to 85% of your benefits may be subject to federal income tax. Consult your Income tax preparation in Miami firm to verify.
Age 70: Start Date for Enhanced Social Security Benefits
You can defer Social Security benefits until after reaching age 70, and your benefit payments will be higher than if you start earlier. If you make this choice, you don’t have worry about reduced payments if you continue working, but this option only makes sense for those in good health. Beware: depending on your income from other sources, up to 85% of your benefits may be subject to federal income tax.
Age 70.5: Retirement Account Mandatory Withdrawal Rules Kick In
Tax Preparer Miami VieraCPA notes that you must start taking annual required minimum withdrawals from your tax-favored retirement accounts (traditional IRAs, 401(k) accounts, and the like) and pay the resulting income taxes after reaching 70.5. (You’re not required to take any withdrawals from any Roth IRAs set up in your name.)
Please don’t think you can simply ignore the required withdrawal rules without dire consequences. The IRS can assess a penalty tax equal to 50% of the shortfall between the amount you should have withdrawn for the year and the amount you actually withdraw (if anything). That’s one of the harshest penalties in our beloved Internal Revenue Code.
The initial required withdrawal is for the year you turn 70.5, but you can postpone taking that one until as late as April 1 of the following year. The downside of choosing this option is that you must take two required withdrawals in that following year and pay the resulting double tax hit. For example, if you turned 70.5 in 2011 and did not take your initial required withdrawal in 2011, you face a 4/1/12 deadline for taking that initial withdrawal (that one is actually for the 2011 tax year). Then you must take another required withdrawal (that one is for 2012) by no later than 12/31/12. For each subsequent year, you must take your annual required withdrawal by December 31.
Tax Preparation Miami sites an Exception: If you continue working after age 70.5, and you don’t own over 5% percent of the business that employs you, you can put off taking any required withdrawals from that employer’s plan(s) for as long as you keep working.