MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
UNCLE SAM CAN MAKE SOME BIRTHDAYS MORE OR LESS TAXING
(December 21, 2004) — As you go through life, your birthday may seem less important. But for financial planning, tax, or retirement reasons, your birthday may be significant. Here’s a list from the Virginia Society of CPAs to alert you to those birthdays that change your tax treatment and give you cause to celebrate.
Shortly after your child is born, he or she will need a Social Security number in order to be claimed as a dependent on your income tax return. A Social Security number is also required to open a bank account or buy savings bonds for a child.
When your child reaches age 14, the kiddy tax disappears. Under the kiddy tax, net unearned income exceeding a specific threshold ($1,600 for 2005) that is received by a child under age 14 is taxed at the parents’ highest marginal tax rate. At age 14 and older, income tax is paid at the child's tax rate, regardless of its source or the amount.
If your child turns age 17 during 2005, you can no longer claim the child tax credit ($1,000 for tax year 2005 in accordance with the Working Families Tax Relief Act of 2004). This is also the last year for contributions to a child’s Coverdell education savings account, unless the beneficiary qualifies as a “special needs beneficiary.”
Age 18 or 21
Depending on the state in which you live, age 18 or 21 is the age of majority, which means your child can do whatever he or she wants with any money you have put into a custodial account in his or her name.
All funds in a Coverdell education savings account must be distributed to the account’s beneficiary 30 days after his or her 30th birthday. The balance of any unused funds in the account can be rolled over to a Coverdell for another qualified family member under the age of 30. This age limit does not apply to beneficiaries with special needs.
Age 50 is the first year you’re eligible to take advantage of the “catch-up” retirement provisions. Catch-up amounts vary according to the type of retirement plan. For 2005, anyone age 50 or older can contribute an extra $500 to an IRA. The catch-up amount for qualified retirement plans, such as a 401(k) plans, is $4,000.
If you leave your job at any time during or after the calendar year in which you turn 55, withdrawals from your 401(k) or other qualified retirement plan are not subject to the 10 percent early distribution penalty. Distributions are subject to regular income tax.
After reaching age 59½, you may be able to make withdrawals from an IRA or qualified retirement plan without incurring the 10 percent early distribution penalty. Ordinary income taxes may apply.
Sixty is the age at which a surviving spouse becomes eligible for Social Security benefits based on the deceased spouse’s work record. If you elect to receive benefits at age 60, you will receive less than the full benefit your spouse would have received upon reaching full retirement age.
You can start collecting Social Security at age 62, though your benefits will be reduced by 20 percent or more. At age 62, you also become eligible for a reverse mortgage, a special type of loan that lets older homeowners convert the equity in their home into cash to help meet financial needs.
Age 65 to 67
The age when you begin to collect full Social Security benefits gradually is being shifted from 65 to 67. You’re eligible for Medicare beginning in the month you turn 65.
If you postponed collecting Social Security benefits beyond your normal retirement age in order to maximize your payments, don’t delay any longer. Your benefit amount stops increasing after you reach age 70.
If you are a participant in a company retirement plan or a Keogh plan and you are not more than a 5 percent owner, the required beginning date for distributions is generally the later of April 1 following the year you reach age 70½ or April 1 following the year you retire. If you own a business interest of more than 5 percent, your beginning distribution date is April 1 of the year following the year you reach age 70½ even if you are still working.
Regardless of whether or not you are still working, if you reached age 70½ last year, you must begin to take minimum required distributions from your traditional IRA. Only money in a Roth IRA can continue to avoid taxation by April 1st of the year following the year you reach age 70½. Owners of a Roth IRA are not subject to minimum distribution requirements, but beneficiaries of a Roth IRA are.
If this seems like a lot to remember, keep in mind that a CPA [and CERTIFIED FINANCIAL PLANNER™ professional] can help you address your tax and financial needs, whatever your age.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
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