Monday, March 24, 2008

My own IRS "pre-audit": due diligence for a retiree in special circumstances

I am, as many readers know, a “retiree” myself, not quite 65, having retired early, subject to earnings limits. Due to a family eldercare situation that I don’t give much detail about, I am living “at home” and in a sense “rent free” so I wanted to check everything in the tax and SSA rules to make sure I wasn’t doing anything “wrong” before filing this year’s tax return electronically with HRBlock.

In general, it appears that as long as I keep my return completely separate, with no claims of dependency (either way) or deductions, there are no complications.

I'm giving some links here that check the tax law and SSA policies as they would apply to me, as best as I can tell from reading the regs online. Visitors should always read the material and "fine print" carefully; I make no claims that I couldn't have missed something in drawing my own conclusions.

Visitors should always talk to their tax advisors or attorneys about their own particular circumstances, if they still have questions.

The IRS link for the Economic Stimulus Payment of 2008 is here.

Note that the Govtrack reference for the Economic Stimulus Act of 2008 (HR 5140) is here.

One issue of concern to me is the capability to reduce taxes by plowing IRA contributions back. I had Pension Annuity IRA withdrawal on a systematic withdrawal option that withdrew more than was needed. But there is a limit ($5000 for over certain ages) that can be plowed back, and it must be covered by earnings obtained by actually “working” (by and large, the same kinds of income that would apply to the Social Security Annual Earnings Limit Test.

Here are a couple of links on IRA maximum contributions in these circumstances:


2 (clearer, I think)

Another set of links here concerns my making sure that there is no “implied” tax liability for (my) living with “family” in certain sensitive circumstances. IRS generally takes “personal use” off the table for tax purposes and regards blood relatives as family for “personal use” determination (regardless of how one feels about this matter socially).

A couple of references.

Personal Use of Business Property

Residential Rental Property

Detailed examples. This link gives an example (#2) in which a sister-in-law is considered immediate family. This example supports the idea that personal use of a dwelling by relatives does not affect income taxes one way or another unless one tries to claim deductions of some kind (or dependents).

I have made earlier postings on the fact that you do not need to have social security income withheld, but may be responsible for taxes on up to 85% of it.

If you have “self-employment” income of more than $400, here is the reporting requirement for social security tax purposes. Link.

In some cases, family members are eligible for benefits on your account, as long as they are not using their own separate accounts. Here is the basic reference.

The following glossary for SSA may be useful: Link.

Notice the definitions of “number holder” and “wage earner” as synonyms.

The concept of “number holder” eligibility on his or her own work record is explained here.

The main link for “family maximum” is this. The "Family Maximum" always applies to one "number holder" ("wage earner") and does not apply to two relatives who already have their own accounts (as best I can tell). This is a critical point (in administrative law), because some people might argue that this is not "just."

Basic link for Social Security POMS Manual for retirees is here.

Update: March 31

The "Specified Private Activity Bond Interest" item appears to be taxable only when one is subject to the Alternative Minimum Tax (AMT). Here is a typical link from Franklin Templeton.

There is a lot of confusion on how to estimate the tax liability for social security income. Here is a good site (Bankrate) to explain it: link. I overestimated the liability in my case. You have to be "pretty good with numbers" like the Ben Campbell character in the movie "21" to get this.

Example: You make $21000 outside of social security, and collect $16000 in benefits. You take 50% of the SSA benefits, or $8000, and add to the $21000, to get $29000. You subtract the $25000 floor. The remainder, $4000, is taxable at 50%, so $2000 gets added to your gross income. That rate can go up to 85% if the total (the $29000 in this example) goes over $34000 for a single person. These rules appear to apply to the gross income, before taking any deductions or exemptions.

Tax software programs know how to make this calculation.

Curiously, apparently the only IRS form only for "worksheet for Social Security Recipients" is on publication 590 for IRA's, link here.

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