The taxman still cometh
Just because you're retired doesn't mean the IRS has gone away
When credit is due. Retirees 65 or older with limited income and meager or no Social Security benefits may qualify for part of a tax credit of up to $750 for individuals and $1,125 for couples. But it's a limited break: The credit is reduced as income rises and is phased out completely when, for example, a single person's AGI hits $17,500. A couple in which both spouses are 65 or older is ineligible when AGI hits $25,000. Also, the credit phases out if you receive Social Security benefits and is erased, for example, when benefits exceed $5,000 for a single person or $7,500 for a 65-or-older couple.
Taking care of the kids. Grandparents bringing up young children may be able to claim a dependent deduction--$3,100 for each qualifying child in 2004--as well as the current $1,000-per-child tax credit for children under age 17. But the person claiming the deduction or credit must generally supply over half the child's support, and if your income exceeds certain levels, part or all of the deduction and credit may be barred. Note: Well-to-do grandparents can get a break on estate tax by helping grandchildren with schooling. Tuition payments are not subject to gift tax if they're paid directly to the educational institution, and this reduces the assets left in an estate to be taxed.
Tapping a nest egg. You can't take your retirement benefits with you, but neither can you haphazardly pass them on to heirs. Tax-deductible deposits in traditional IRA s, for example, must start to be withdrawn after age 70 1/2 in minimum yearly amounts based on an IRS formula tied to life expectancy. A separate formula can lower the minimum amount if your spousal beneficiary is more than 10 years younger than you. Funds in a Roth IRA can be left untouched with no required minimum withdrawals. (In these accounts, there's no deduction for deposits, but withdrawals typically are not taxed or only partly so.) Rules for other plans vary--those who are still employed can often delay taking money from a 401(k) beyond age 70 1/2, an option not available for IRA balances.
Though you may have a choice, an employer may make a lump-sum distribution of your 401(k) assets when you leave a firm. You can avoid tax by rolling over the money into an IRA or other retirement plan--with limits for people over 70 1/2. People born before 1936 may benefit from a special break known as 10-year averaging on 401(k) and some other retirement plan distributions. Tip: If you have several IRAs, the required total minimum distribution for all of them can, if you wish, be satisfied with an equivalent withdrawal from just one of them. That can allow you to choose which to keep.
Pulling up stakes. Many retirees move into smaller housing or to a new location. That opens up a major tax saver for people who pull in a profit from the sale of their home. Up to $250,000 of profit--$500,000 for a couple--can escape tax. You can claim the break again for later moves, and it is available to people of all ages. One test: You must generally have lived in the home as your principal residence for at least two of the past five years before the sale.
Note: Although the IRS checks post office change-of-address records, directly notifying the agency can safeguard against misdirection of IRS mail. Last year, some 93,000 refunds worth an average of about $722 were returned to the IRS because of invalid addresses. Use IRS Form 8822.
advertisement
