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Greetings!
Three Months of winter down and just two to go!
This is issue number 12--an anniversay of sorts. When I started these I thought it would be difficult to find something to write about each month--so far so good--the subject matter is so broad.
First off, tax season is upon us, and that usually sparks IRA discussions; here are some pertinent facts about Individual Retirement Accounts.
IRA deduction levels for 2009 and 2010 remain the same--$5,000 per year, and an extra $1,000 catch up if you're over 50 years of age. The same amounts apply to Roth IRA's.
You can make your 2009 contributions up until the day you file your taxes--or April 15 at the latest. If you or your spouse are covered by another retirement system there are income limits (Modified Adjusted Gross Income) that determine if your contribution is deductable or not--for individuals covered by a plan:
Year Single Married Filing Jointly
2009 $55,000 - $65,000 $89,000 - $109,000
2010 $56,000 - $66,000 $89,000 - $109,000
If only your Spouse is covered:
2009 $166,000 - $176,000
2010 $167,000 - $177,000
One other thing; oftentimes, people might not be able to make the whole IRA contribution, so they don't make any. Remember, you don't have to make the whole $5-or $6-thousand payment--you can as we've encouraged many times before--make regular monthly contributions in amounts you can afford--as low as $25 per month in some cases. You should save what you can afford--and save money you are not going to need until you are at least 60 years old. But save you should or else you'll be depending solely on Social Security in your elder years.
Marty
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The Worker, Homeownership and Business Assistance Act of 2009
If you are thinking buying a new home, downsizing or just moving away from your pesky neighbor, the US Government has a deal for you; "The Worker, Homeownership and Business Assistance Act of 2009" is a gift from Uncle Sam that may reimburse you $6,500 from your 2009 or 2010 tax bill. Read no further if you're not actively shopping for a new home-this tax credit is not a substantive reason to move-it's merely a bit of incentive to nudge those who are already thinking of changing residences.
But like some many things the Congress does, the devil is in the details-and there are several qualifications, rules and requirements that must be met before they, grudgingly let you keep some of your tax obligation. Rather than explain each rule in detail I'll just list them. If after reviewing the list you find that you still might fit, then do some further research. If the credit seems easy to get, you've probably missing something; Congress designed this tax credit to fit a tight knit group of buyers. You might qualify if you meet these byzantine-like rules:
1. You must have lived in your current principal residence for a consecutive 5 out of the last 8 years.
2. You are buying a principal residence, (Condos included) for under $800,000.
3. You must have a Modified Adjusted Gross Income for single filers of less than $125,000 and for Joint filers less than $225,000.
4. You have purchased (signed the sales contract) the new home between November 6, 2009 and April 30, 2010.
5. You must close at least before June 30.
6. The actual credit is 10% of the new home price-up to $6,500 maximum.
7. If you move out of the new house within three years you must pay the credit back.
8. You or your spouse cannot be related to the person selling the home.
9. To get the credit, use IRS Form 5405[1].
Most realtors will know about the Act and I am sure would be happy to research it further. If you want to read more on the provisions you can find it on-line at the IRS' website, (http://www.irs.gov/newsroom/article/0,,id=204672,00.html)
Marty
[1] http://www.irs.gov/pub/irs-pdf/f5405.pdf |
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Concept of the Month: Social Security
OK, last article on Social Security; I have covered most of the areas that frequently generate questions. All but one that is, "How do they tax Social Security Benefits?" Well, like everything else about Social Security and the US Government, it's complicated (see the adjacent article on the Home Buyer's Credit).
Taxing SS benefits began in 1983 when Congress, always on the hunt for new money, imposed a tax on 50% of SS benefits for those singles who made over $25,000 and those couples who made over $32,000. Returning to the well in 1993 they added another graduation, this time 85% of benefits are taxed on single filers who make more than $34,000 and couples who make more than $44,000.
In the height of incrementalism, Congress didn't not index those wage levels for inflation; so while only a small percentage of retirees were affected at first, the number of those who now have their Social Security benefits taxed has grown steadily and significantly.
Now here is where it gets complicated-instead of using your Adjusted Gross Income (the last line on the first page of the IRS Form 1040) the IRS uses something called Provisional Income. So where do you get that number? Well, start with your gross income, add any tax-free interest, plus 50% of your SS benefits, plus tax-free benefits and exclusions, and then subtract adjustments to income[1]and you have your provisional income. See the footnote for a link to a good definition by Investopedia.
I always say that it is easy to criticize, hard to create but why on earth would Congress or the IRS or whoever thought up this plan require these mathematical gymnastics simply to tax money that Government pays out to begin with! Seems like a long road to take to get a few bucks out of some older folks working to make ends meet. But I digress-the bottom line here is: if you earn money while collecting Social Security it may create a taxable situation for your SS benefits. In the long run, it's only 50% or 85% of your benefit that is then added to your Gross Income and then taxed at your effective marginal rate.
So let us say that after the calculation, $10,000 of your benefit is taxable at your effective marginal tax rate, to wit; 15%, your bill is increase by $1,500. Not too bad-unless of course, it bumps you into the next tax bracket (25%); which is just too dreary to contemplate on a January morning.
If you're collecting Social Security and still working (great-I admire you) but be sure to ask your tax preparer how much in income taxes the added income cost you.
Next month, in the interest of really scrambling my brain we'll tackle Medicare.
Marty
[1] http://www.investopedia.com/terms/p/provisional-income.asp
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Book I am reading now:
Jude the Obscure by Thomas Hardy--orignally published, 1885, Penguin Classics, 1995, New York, NY | |
