Timely Tax Tips


Apr 6, 2017

 


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#41380 Apr 6, 2017

Timely Tax TipsBy Tammy Flanagan3:00 PM ETApril is already upon us, and I hope most of you are eitherfinished or in the last stages of preparing your 2016 tax returns. Ifyou have recently retired, you may be learning that their are somebenefits to leaving the workforce when it comes to income taxes. Forthose of you in the planning stages, it might be a good time to thinkthrough the tax implications of preparing for your separation fromfederal service.FIrst, for some good news: Some states don.t tax your retirementincome, and others don.t have a state income tax at all. The NationalActive and Retired Federal Employees Association provides a state by state tax guidefor federal retirees. If your state does tax federal retirementbenefits, the Office of Personnel Management will not withhold stateincome taxes unless you choose to have such withholding after yourretirement is processed. You may use OPM Services Online to make this selection. Some retirees choose to make estimated tax payments directly to their state tax office.When it comes to federal income taxes, most, if not all, of yourretirement income is taxable. You won.t pay Social Security or Medicarewage taxes any more (unless you go back to work), but there are ordinaryincome taxes to consider.The good news is that a portion of your retirement is tax-freebecause you have already paid tax on your Civil Service RetirementSystem or Federal Employees Retirement System retirement contributionsduring your federal career. To figure out the tax-free portion of yourretirement benefit, you will need to consult IRS Publication 721.Be sure you have tax withholding or pay estimated federal taxes on yourCSRS or FERS annuity, or you may owe a penalty if the total of yourwithheld tax and estimated tax doesn.t cover most of the tax shown onyour return.Generally, you will owe the penalty for 2017 if the additional taxyou must pay with your return is $1,000 or more and greater than 10percent of the tax to be shown on your 2017 return. For moreinformation, including exceptions to the penalty, see Chapter 4 of IRS Publication 505.In addition to your CSRS or FERS annuity benefit, don.t forget aboutyour Thrift Savings Plan withdrawals. Remember that taking too large of apayout in one year can push you into a higher federal tax bracket. The TSP offers a publication, Tax Information: Payments From Your TSP Account, that will guide you through the mandatory withholdings from your payments and those that can be changed.In addition to ordinary income tax, there may be a 10 percent earlywithdrawal penalty applied if you take money out of your account beforeage 59 .. But if you were 55 or older in the year you left federalservice, you can make a partial withdrawal or begin a series of monthlypayments from your TSP account without paying the penalty. Qualifiedpublic safety employees who retire in the year they turn age 50 or laterare also exempt from the penalty.Then there are Social Security retirement benefits. Some peoplereceive them tax-free, but if you have a pension or other retirementincome, you may find that as much as 85 percent of your Social Security retirement will be taxable. Most states don.t tax Social Security benefits, but some do, so be sure to check the tax rules of your state.According to this Kiplinger slide show,retirees often overlook tax breaks available to them. For example, didyou know that a 65-year-old gets a larger personal deduction thansomeone younger? Also, taxpayers age 65 and older get a break when itcomes to deducting medical expenses. Those who itemize deductions ontheir 2016 returns get a deduction if their medical bills exceed 7.5percent of adjusted gross income. For younger taxpayers, the adjustedgross income threshold is 10 percent. If you.re married, only one spouseneeds to be 65 to use the 7.5 percent threshold.For those of you who are qualified for Medicare, did you know thatyour income may affect the premium you pay for Medicare Part B?Historically, taxpayers have funded three-fourths of the Part B premiumand the enrollee has paid only one-fourth of the cost. Under currentlaw, however, some higher-income enrollees pay more than the traditionalshare. Medicare Part B has a 2017 premium of $134 per person per month.Some beneficiaries pay a little less than this due to a .hold harmless.provision, but some pay a lot more.To determine your 2017 income-related monthly adjustment amounts,Social Security will use your most recent federal tax return file withthe IRS . which is not the one you.re getting ready to file this month.Most likely, it will be from your return filed last year, covering taxyear 2015. But depending on the time of the year, the IRS may provideinformation from a return filed in 2015 for tax year 2014.A reader recently let me know that he appealed the surcharge on Medicare Part B premiums using form SSA-44. He was already over 65 and was making use of the special enrollment period forthose who delay Part B enrollment until after retirement. They are notcharged the late enrollment penalty as long as they were covered bycurrent employment health insurance and completed the enrollment withineight months of their retirement date.In the reader.s case, he had an income while working that would havecaused the Part B premium to double with the surcharge for both he andhis wife, who file jointly. So he filled out the appeal form and droppedit off in person at his local Social Security office to make sure hehad all the needed documentation. He was advised to file the form againat the end of the year once he had his income figures for 2017.Tax planning is an important part of the retirement preparationprocess. And the time to think about it is before you retire, so youdon.t get any unpleasant surprises when you figure out your actual netretirement income.Photo: Pictures of Money, via Flickr

By Tammy Flanagan3:00 PM ETwww.govexec.com/pay-benefits/retirement-planning/2017/04/timely-tax-tips/136789/







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