In our last post we talked about, ages 0-49 birthday surprises from Uncle Sam. This week, ages 50 and up get to discover their birthday gifts or surprises from the IRS when you file your tax return next tax season. As we mentioned, in some situations the gift may not be because you reached a certain age, but will be the result of the age your dependent(s) or spouse turned this year. Unfortunately, not all of Uncle Sam’s gifts will be welcomed on this birthday, because some birthdays mark the end of eligibility for certain credits or exclusions of income. Others signal the start of needing to include retirement benefits in income.
A Birthday Over 50
Age 50 – Are you a qualified public safety employee, such as a police officer or fireman who separates from service after age 50? Did you take a distribution from your government employer’s defined benefit pension plan? You should know that the 10% early withdrawal penalty will not apply.
Age 55 – If you take a distribution from your employer’s qualified retirement plan after separation from service in or after the year you reach age 55, the distribution is not subject to the 10% penalty that usually applies when distributions are taken before age 59-1/2. To qualify for this exception to the penalty, you must be age 55 or older, and then separate from employment. This provision does not apply to IRAs.
Age 59-1/2 – The half birthday is just as important to pay attention to. Once you have reached age 59-1/2, distributions from your qualified retirement plans and traditional IRAs are no longer considered to be early distributions. Therefore, the distributions are not subject to the 10% early withdrawal penalty. However, in most cases, all of the distribution amount is included as your income and will be taxed.
Age 62 – Many individuals opt to start receiving their Social Security benefits on this birthday. The benefit will be at a reduced amount than if they had waited until they reached full retirement age. Full retirement is when they first become eligible to receive the payments, generally at age 62. If this is your first year for collecting SS benefits, whether at age 62 or another age, you may be surprised to learn that part of the benefits may be taxable. Depending on your other income and filing status, 50% to 85% of the benefits may be taxable.
Age 65 – As mentioned above, starting with the year you reach age 65, you are eligible for an additional standard deduction amount. For 2015, the extra amount is $1,550 for a taxpayer filing as single or head of household or $1,250 for those filing married joint, married separate or a qualifying widow or widower. There is no extra deduction if you itemize your deductions. If you file a joint return for you and your spouse, if he or she is also age 65 or older, you are each allowed the additional amount.
Through 2016, if you itemize deductions and either you or your spouse, filing a joint return, and you are age 65 by the end of the year, you need to reduce your medical expenses by only 7.5% of adjusted gross income. This is instead of the 10% reduction rate that applies to other taxpayers. If you are subject to the alternative minimum tax, only medical expenses exceeding 10% of your regular AGI are deductible for the AMT computation.
If you have been claiming the earned income credit without having a dependent child, you will no longer be eligible for the credit starting in the year you turn 65.
Contributions to a health savings account (HSA) are not permitted once you are entitled to benefits under Medicare. This means you are eligible for and have enrolled in Medicare. Most individuals become Medicare eligible and enroll at age 65. Contributions to the HSA may continue until the month you are actually enrolled in Medicare.
Age 70-1/2 – Remember that half birthday comment above? If you turned 70-1/2 in 2015, distributions from your traditional IRA must begin by April 1, 2016. Otherwise, a minimum distribution penalty can apply. You must continue to take distributions annually. Not only must you take distributions after turning 70-1/2, the law specifies how the minimum distribution is to be calculated. You may take a larger distribution, but the amount in excess of the required minimum distribution amount cannot be used to reduce future required distributions. You are considered age 70-1/2 on the date that is 6 calendar months after the 70th anniversary of your birth.
In general, if you are or were an employee whose employer has a qualified plan, distributions from the qualified plan must begin no later than April 1 of the year following the year in which you reach age 70-1/2 or (except if you are a 5 percent owner), if later, you retire. This “retirement, if later” exception does not apply to IRAs.
If you were required to take your first distribution in 2015 but delay the withdrawal until April 1 of 2016, you will then have two distributions to include in your 2016 income, since the regular 2016 distribution must be taken by December 31 of that year. You cannot make a contribution to a traditional IRA for the year in which you reach age 70 1/2 or for any later year. Contributions to Roth IRAs, however, are allowed regardless of age on your birthday, provided you have wages, self-employment income or alimony income.
Are you Celebrating a Birthday Milestone?
If you or a member of your tax family celebrated a milestone birthday (or half-birthday) this year and you have questions as to how the tax implications of that event will affect your return, please give Alex Franch, BS EA a call at 781-849-7200.