The IRS requires that certain taxpayers take mandatory distributions from their individual retirement accounts (IRAs) before the end of each calendar year. If you are not sure who must take IRA distributions before December 31 of this year, read on to learn more.
For those who are approaching retirement age, it is important to take steps to put appropriate tax planning into place.
This article is the sixth in a continuing series about significant life events that have an impact on your federal income tax return filed with the Internal Revenue Service (IRS). The topic of this article is retirement and events generally associated with reaching age 65. Further reading about this area is available on the IRS’s web site.
In general, when you reach “retirement age,” which is officially age 65 per the IRS’s tax code, the tax code is more favorable to you. This includes:
- A higher income level before you have to pay federal income tax
- An increased standard deduction, assuming you do not choose to itemize deductions
- A credit for the elderly or disabled for those who qualify
Even once you reach retirement age or approximately age 65, income is still taxable except when it is specifically excluded from taxation. Exclusions that are commonly related to retiring or events closely related to age 65 include the following:
Compensation for Certain Services
If you perform volunteer work as a part of the Retired Senior Volunteer Program (RSVP), the Foster Grandparent Program, the Senior Companion Program, or the Service Corps of Retired Executives (SCORE), and you receive monies in reimbursement of related expenses or of your services, you need not include it in your taxable income.
Distributions from Retirement Plans
Distributions from retirement plans composed of money that was taxed at the time it was placed in the retirement plan, such as with a Roth IRA, are excluded from taxation at the time you receive a distribution from the plan. The calculations to determine the taxable amount can be complicated depending on the structure of a given retirement plan, and it is usually a wise idea to have the assistance of a tax attorney in calculating the appropriate taxable amount.
Receipts Related to Injury or Illness
If you have a health or disability plan to replace your income in the event you are injury or become too ill to work, the payments you receive from such a plan are not taxable to whatever extent you paid for the health or disability plan (as opposed to the part that your employer paid for the health plan). Health and disability plans subject to exemption include but may not be limited to the following when they provide payments related to injury or illness: long-term insurance contracts, workers’ compensation, Federal Employees’ Compensation Act (FECA), and no-fault auto insurance.
Life Insurance Proceeds
Proceeds paid to you under a life insurance policy, whether at the time of someone’s actual death or as an accelerated death benefit, are not taxable to you as income.
Gain from the Sale of a Home
Any gain you receive from the sale of your home up to $250,000 is excluded from taxation. This amount is double if you are filing a joint federal income tax return.
Amounts Received Related to a Reverse Mortgage
Any payment you receive under a reverse mortgage loan is not considered income to you and is therefore not taxable on your federal income tax return.
The following additional items are also generally excluded from your taxable income:
- Gifts and inheritances
- Veterans’ benefits
- Public assistance benefits, such as welfare, state funds for crime victims, Home Affordable Modification Program (HAMP), mortgage assistance payments, and Nutrition Program for the Elderly
If you have reached age 65 or have retired and you have questions about your federal income tax, whether it relates to one of the areas mentioned above or other topics, you can speak with a tax attorney who can help address your specific questions and situation.
- Federal income tax significant events, Part 5 – Disabilities (taxlawhome.com)
- Federal income tax significant events – Disasters and Theft (taxlawhome.com)
- Federal income tax significant events, Part 3 – Job Change (taxlawhome.com)
- Federal income tax significant events, Part 2 – Marriage, divorce (taxlawhome.com)
- Federal income tax significant events, Part 1 – Birth (taxlawhome.com)
When you submit your federal income tax return to the Internal Revenue Service (IRS) each year, obviously the idea is for you to submit an accurate tax return. Whether you have calculated your federal income tax yourself or hired a tax professional to prepare your tax return—such as a Certified Public Accountant (CPA) or tax attorney—the income and deductions on the tax return should reflect actual events and be supported by various documentation. This supporting documentation can include your W-2, statements from your bank or mortgage company reflecting interest paid or earned, logs you have maintained of business mileage, contribution forms from charitable organizations, and similar documents. While you do not have to include this supporting documentation when you file your tax return, it should still be used as the basis for the numbers and other information submitted on your tax return, and you should retain copies of that supporting documentation.
When the IRS receives your federal income tax return, the IRS performs several basic checks and reviews of the information on the return before accepting the return and beginning to process your refund (assuming a refund is due to you). This review includes the following:
- Ensuring the names and Social Security Numbers on the tax return match and have not been used on other returns,
- Ensuring calculations—whether addition or subtraction—are accurate and that the various deductions and exemptions are valid for the taxpayer’s situation for the current tax year, and
- Ensuring common indicators of fraud are not present.
In addition to the above checks performed before accepting a return in a given tax year, the IRS can perform a more detailed review for audit purposes. The IRS can review federal income tax returns in detail for up to three years, or for up to six years if the IRS believes a serious mistake has been made on a return, to determine if a formal audit of the return should be conducted.
In either of the above processes, whether the normal review done on all returns or the more detailed review conducted in selecting federal income tax returns for an audit and conducting that audit, the IRS may make changes on your return that may result in you owing more tax. It is also possible that the IRS will make a mistake when determining your return is not accurate, resulting in a miscalculation of the tax debt you owe.
If the IRS has legitimately miscalculated your tax debt, there are two main causes. First, it can be a simple error. Second, it can be because the IRS did not receive sufficient support to allow a deduction, exemption, or other item on your return. In either case, you should take similar steps to resolve the matter.
Have a tax attorney review your return and any information provided by the IRS as to why they believe your return is not accurate. If the tax attorney believes the IRS has made a mistake, you should make use of the appeals process for tax disputes. The appeals process is handled by an independent body from the IRS with the goal of attempting to resolve tax disputes in a fair and unbiased manner.
Additional information about appealing your taxes is available on the IRS web site at http://www.irs.gov/individuals/content/0,,id=98196,00.html .
How can I get help in reviewing my situation and filing an appeal if it is right for me?
If you complete the short form found below, a tax attorney who is knowledgeable about federal income tax returns and the processes for appealing IRS decisions that may be in error will contact you. The tax attorney can have an initial discuss about your situation free of charge and without further obligation to you, and you can rest assured that nothing you share with the tax attorney will be discussed with anyone else, including the IRS. Therefore, you should take this opportunity today to get help in determining if an error has been made by the IRS on your tax return and taking the steps to be sure you pay only the minimum tax you can.
- What are the top five steps to take if you owe tax debt? (taxlawhome.com)
If you owe money to the Internal Revenue Service (IRS) related to unpaid federal income taxes, you should know that the IRS has the power to seize various assets from you to settle the debt. Initially, the IRS will simply notify you that you owe them money, and the IRS will encourage you to pay the amount you owe, whether as a lump sum payment or by establishing a payment plan to settle the tax debt. However, if you do not work with the IRS to identify a way to resolve the debt and you continue to ignore their requests for payment, the IRS can ultimately use a levy to satisfy the debt.
A levy is simply the legal method the IRS has available to them to take your property. An IRS levy can include most anything you have with value that the IRS can then sell or otherwise liquidate in order to satisfy the debt that you owe. The levy can include your salary or income as well. A levy against your wages is often called wage garnishment.
The IRS executes a wage levy by contacting your employer, who then has to withhold a certain portion of your pay to sent to the IRS. The IRS will provide your employer with a method for calculating the maximum amount that your employer can pay you. This means that there is technically no limit or cap as to how much of your income the IRS can take. If you obtain a raise or work overtime, you will not receive the additional money; the IRS will take it.
The amount of your wages the IRS can seize is based on:
- your filing status (e.g., single, head of household, married filing jointly, or married filing separately),
- how often you are paid, and
- how many exemptions you claim on your paycheck.
Depending on your specific situation and how much money you make, an IRS wage levy may mean you no longer take home enough money to pay for the necessities of life or to support your family.
What should I do if the IRS is threatening to garnish my wages?
You should contact a tax attorney to get help in working with the IRS. Addressing unpaid tax liability and the threat of the IRS taking your wages can be a frightening matter, as well as a difficult situation to resolve if you do not have experience in doing so. A lawyer who has training and experience in tax matters will be able to review your situation and work with the IRS on your behalf to resolve the tax matter.
If you would like a free consultation with a tax attorney about your tax issues, you can obtain one by completion the short form below. This consultation is protect by the attorney-client privilege, which means the attorney cannot discuss with the IRS whatever information you share with them, and does not mean you have to hire the attorney to help. But once you speak with the attorney, if you like what they have to say and how they can help you, you will then have someone on your side who can help you address your tax issues.
Please therefore take this opportunity to try to avoid having the IRS garnish your wages. Get help today in addressing your tax issues with a tax attorney by your side.
The Internal Revenue Service (IRS) charges various interest amounts and penalties to taxpayers related to the filing of federal income tax returns or the payment of taxes.
Late filing of taxes. The IRS requires that taxpayers file their tax returns each year by April 15 (or technically around April 15, in cases where April 15 falls on a weekend). If needed, a taxpayer can file an extension with the IRS, which gives the taxpayer six additional months to file their tax returns, or until November 15. But whether you are filing your tax return on April 15 or November 15, you must file it. Even if you owe taxes and cannot afford to pay them at the time you file, the IRS still requires that you file your tax return.
If you do not file your tax return on time, the IRS will charge you what is known as a Failure to File penalty. The Failure to File penalty is charged at the rate of 5% of the tax liability due per month, up to a maximum amount of 25% of the tax liability due after five months. For example, if you owe $400, 5% of this amount is $20. This means that after five months, an additional $100 will be added to your tax bill, bringing your total amount owed to $500.
In addition, if you fail to file your tax return for too long, the IRS will file what is known as a substitute return for you. In all likelihood, the substitute return will result in you owing a larger tax balance than if you file the return on your own, as the IRS will use the standard deduction rather than any itemized deductions you might have been able to use.
Late payment of taxes. The IRS requires that taxpayers pay any tax they owe on April 15 of each year. Even if a taxpayer files an extension with the IRS so that they do not have to file their return until November 15, the IRS still expects you to pay the tax you owe by April 15.
If you do not pay your tax liability on time, the IRS will charge you what is known as a Failure to Pay penalty. The Failure to Pay penalty is charged at the rate of .5% of the tax liability due per month, with no maximum amount for this penalty. Therefore, for example, if you owe $400, .5% of this amount is $2. This means that after five months, an additional $10 will be added to your tax bill, bringing your total amount owed to $410.
As you can see based on the information and examples above, the IRS considers someone failing to file their tax returns a much more serious matter than someone who files their tax returns but does not pay the tax liability due on time.
In addition to the penalties noted above, the IRS charges interest on the unpaid tax liability. The interest rate charged by the IRS is based on current interest rates, adjusted every three months.
How can I get help in filing my tax return or addressing my unpaid tax liability?
If you need help with your tax return, a tax attorney can provide you with assistance. A tax attorney knows the tax laws and will have experience in working with the IRS regarding unfiled tax returns or unpaid taxes due.
You can get help from a tax attorney by completing the short form found below, and a tax attorney will contact you. The initial discussion with the tax attorney is free of charge, completely confidential, and does not obligate you to anything further. Therefore, if you need help with your taxes, please take this opportunity today to get the help you need.
On January 1 of each year, the Internal Revenue Service (IRS) makes various changes to the Internal Revenue Code and therefore to the laws governing how we calculate federal income tax returns. This means that you as the taxpayer must be familiar with these changes if you are preparing your tax return yourself, or if you are using a trained tax professional to complete and file your tax return, being sure he tax professional is familiar with the changes to the tax laws. The primary reason the IRS is making the changes in the tax laws for 2012 is to adjust for inflation. Therefore, in general, if you earn the same amount of money in 2012 as you earned in 2011, you will pay slightly less tax in 2012 as compared to 2011.
Keep in mind that while these changes go into effect as of January 1, 2012, they will not impact your federal income tax return until the return you need to file by April 15, 2013. The federal income tax return you need to file by April 15, 2012 is based on the tax laws that were in effect during the 2011 calendar year.
Without further delay, here are the most important changes for the 2012 tax year.
Increase in personal exemptions. The personal exemption amount has been increased $100 to $3,800.
Increase in standard deductions. The standard deduction has increased different amounts depending on the filing status used by the taxpayer, with the increases as follows:
- For married filing jointly, up $300 to $11,900
- For singles/married filing separately, up $150 to $5,950
- For head of household, up $200 to $8,700
Increase in tax bracket thresholds. The amount of money separating each tax bracket has increased, so you must earn more money before you move into a higher tax bracket as compared to 2011.
Increase in medical savings deductible. The annual deductible amount for Medical Spending Accounts (MSAs) has increased by various amounts depending on if you are an individual or a family. The MSA is money that can be set aside pre-tax to spend on medical expenses.
Increase in student loan deduction phase out level. Up to $2,500 in interest paid on student loans may still be deducted, but the income level when this deduction is phased out has increased by $5,000. The phase out not begins at $125,000 and phases out completely at $155,000.
Increase in estate tax exclusion. The amount left behind upon someone’s death, known as their estate, is not taxed unless it exceeds $5,120,000, which is up $120,000 from the 2011 amount.
How can I get help from a tax attorney in calculating my income tax?
If you need help from an attorney, please complete the short form below and a tax attorney can contact you to discuss your situation. A tax attorney can start discussing your situation at any point during the year, but the earlier in the year you involve a tax attorney, the sooner you can take steps to keep documentation that will help to better file your tax return.
Keep in mind that the initial consultation with a tax attorney is free of charge, completely confidential, and does not obligate you to anything further. Therefore, please take this opportunity to start getting help in completing your tax return correctly based on the updated tax laws.
It will only be a few months before the new year, which means it will be time to start preparing to file your federal income tax return with the Internal Revenue Service (IRS) for the 2011 tax year. When you calculate your federal income tax, you could be one of the many who find that you owe additional tax. When this happens, what should you do?
Following are five things you should keep in mind when you owe a tax debt to the IRS.
Obtain help from a professional tax preparer. Did you obtain help from someone when you calculated your income tax, either a Certified Public Accountant (CPA) or another professional tax preparer? If you did not, you should have a tax preparer check your work. There is the possibility that when you calculated your taxes and found that you owed money, you made a mistake. You could have left out a deduction or made other errors that led to you owe more money than you should owe or that may prevent you from getting a refund due to you. And depending on the mistake, it is not likely that the IRS will find and correct the mistake for you. Therefore, be sure your taxes are correct if you find you owe money.
File your tax return. Once you complete your tax return, you need to file it, even if you owe money and cannot afford to pay it. The IRS will charge you interest and a penalty when you file your tax return and fail to include a payment for the tax you owe. But if you do not file your tax return at all, the IRS will charge a much larger interest rate and penalty on the unpaid tax balance. Therefore, it is in your best interest to file your tax return on time and then work out a strategy for paying the tax liability due.
Pay the tax you owe. If you owe tax to the IRS, it is in your best interest to simply pay it when it is due on April 15 if you can afford to do so. As noted above, delaying payment of your tax will generally result in you still having to pay the tax you owe in addition to interest and penalties charged by the IRS.
Contact the IRS. If you cannot afford to pay the tax you owe, you should contact the IRS. The IRS has several options to work with taxpayers who cannot afford to pay their taxes in one lump sum, including a payment plan and an offer in compromise. But to even be considered for one of these payment options, you must file your taxes and work within the IRS’ system for applying.
Hire a tax attorney. If you owe money to the IRS you cannot afford to pay, a tax attorney will be able to help you. A tax attorney has training and experience with tax matters, including working with the IRS. An attorney will be able to help evaluate your specific tax situation, if you are likely to qualify for one of the IRS’ payment options for settling your tax debt, and if you do appear to be a candidate, helping you complete the application to increase the likelihood that the IRS will accept it.
How can I get help from a tax attorney?
If you complete the short form below, a tax attorney can review your tax issue free of charge. This review is completely confidential and does not obligate you to anything further. So take advantage of this change to get help in addressing the taxes you owe.
As part of the ongoing investigation of the sexual-abuse scandal related to Jerry Sandusky and Penn State University, it has come to light that Joe Paterno sold his ownership in his home to his wife Susan Paterno for $1 on July 21, 2011. Although Mr. Paterno is not being investigated or pursued (at this time) for criminal charges related to the Sandusky investigation, there is a great deal of uncertainty as to how much Mr. Paterno and other officials with Penn State knew about Sandusky’s alleged illegal activities and if Mr. Paterno and others should have done more to stop Sandusky. Many legal experts believe that Mr. Paterno will likely face a civil suit from the families of the victims for failing to take action to protect the victims from the alleged sexual abuse.
Given the timing of when Mr. Paterno sold his home to his wife, it has been theorized that the sale was an attempt to shield Mr. Paterno’s home in the event a civil suit is filed against him. Specifically, Lawrence Frolik, a law professor with the University of Pittsburgh, indicated the transfer looks “like an attempt to avoid personal liability in having assets in his wife’s name.” If a civil suit is brought against Mr. Paterno and it is proven that the transfer was purely for the purpose of shielding his home from the lawsuit, then the court can reverse the sale and make it available in the event the plaintiffs win the civil suit.
However, Mr. Paterno’s attorney Wick Soellers has claimed from the start that the transfer of the home to Ms. Paterno was for estate tax planning purposes and not to shield the home from a civil lawsuit. While the estate tax planning position was generally dismissed initially because of comments such as the one noted above from Mr. Frolik, after further investigation, it does appear that the estate tax planning position does have merit for two reasons.
First, under Pennsylvania law, when a husband and wife buy a home together, they are each considered to own 100% of the property. If a civil suit is brought against one spouse, such a property that is jointly owned is not an asset made available should the plaintiff win the civil suit, as it would violate the rights and ownership in the property of the other spouse.
Mr. Paterno’s home was owned jointly by Mr. and Mrs. Paterno. Therefore, under the law noted above, the Paterno’s home was already completely protected from any civil suit that could be brought against Mr. Paterno. Only in the event that a civil suit were brought against both Mr. and Mrs. Paterno would the home be potentially included in a payout should the suit be lost by them.
Second, the estate tax laws for the state of Pennsylvania are currently set to change. At present, when someone dies and leaves an estate, the first $5 million in assets are exempt from estate tax and any assets above that amount are subject to taxation at the rate of 35%. As of January 1, 2013, the exempt amount drops to $1 million and the tax rate for anything above this exemption level rises to 55%.
Therefore, assuming Ms. Paterno does not have assets worth $5 million already, it is a smart estate tax planning move to transfer their home (which is worth approximately $600,000) into her name before this exemption level drops. Such a transfer is completely legal and is recommended by estate tax planning attorneys with clients who have sufficient assets to be impacted by these thresholds.
Given the facts that are now available related to the tax laws in the state of Pennsylvania and the ownership of the Paterno’s home, it does appear that the sales of Mr. Paterno’s home was for estate tax planning purposes rather than to shield the home from a civil suit.
What if I have questions about estate tax planning or other tax topics?
If you need help from a tax attorney, you can complete the short form below and a tax attorney will contact you to review your situation. This review is completely confidential, free of charge, and does not obligate you to anything further. Therefore, please take this opportunity today to get the help you need with your tax questions.
While a tax attorney can help you resolve your tax issues, they cannot guarantee a specific result. Each case is unique. Although a tax attorney will know the tax law applicable to a given situation and how the Internal Revenue Service (IRS) generally treats each such situation, there is no requirement that the IRS respond to your situation in the exact same manner as they have other similar situations.
However, even though a tax attorney cannot guarantee results, an attorney can generally help you with the following tax matters.
Understand notices received from the IRS. The IRS has a variety of letters they may send to a taxpayer notifying them about possible issues with their tax return. Whatever you do when you receive a notice from the IRS, you should not ignore it. While all notices sent by the IRS do not necessarily mean bad news, you need to read the notice to be sure and attempt to take the steps the IRS is asking of you. If the IRS does need you to take some form of action, ignoring it will only make the matter worse. If you do not understand what the notice means, a tax attorney can help you understand the notice and what you need to do.
Address an audit from the IRS. Although a relatively small number of tax returns are audited each year by the IRS—somewhere around 1% of returns filed in a given year—if your return is one of the ones the IRS selects to audit, you need to take action. A tax attorney can help you work with the IRS to understand the reason for the audit and to be sure any materials you provide to the IRS address the specific need.
File one or more prior tax returns. While most people use a tax preparer or a Certified Public Accountant (CPA) to help them file tax returns, a tax attorney is who you should turn to when you have one or more past due returns. A tax attorney is the only one who will be able to help you address any legal matters related to the unfiled returns. An attorney is also the only one who is not legally obligated to tell the IRS everything you have shared with them.
Negotiate a settlement with the IRS for tax owed. Just because you owe money to the IRS, it does not mean that you will have to pay all of it. Depending on your situation, it may be possible to negotiate a payment arrangement with the IRS to address the tax liability for less than the full amount you actually owe. A tax attorney will know all the options you have available for addressing your tax owed and how to step through the process and various forms that must be completed to take advantage of each option.
How can I contact a tax attorney to help me with my specific issues?
When you decide that you are ready to get help from a tax attorney, you can do so by completing the short form below. Completing this form will get you in touch with an actual tax attorney who can discuss your matter with you free of charge. This discussion is completely confidential and does not obligate you to anything further, so please get help from a tax attorney today so that you can be free of your tax issues soon.