What No One Tells You about Social Security Benefits

What No One Tells You about Social Security Benefits

What No One Tells You about Social Security Benefits

The system of receiving Social Security Benefits was introduced way back in 1935 when the then President, Franklin Roosevelt, signed the Social Security Act. The current regulations governing Social Security Benefits have been through various amendments since their inception. Currently, under the Social Security Benefits, four different types of benefits are paid. These include retirement benefits, disability benefits, dependents benefits and survivor’s benefits.

Though you might know that your Social Security Benefits depend on your level of income and for how long you have worked, there are some facts about such benefits which you might not know. Given below are some common facts which no one tells you about your Social Security Benefits:

  • The ‘full retirement age’ depends on the year of your birth
  • Getting benefits after divorce
  • The Social Security Benefits are calculated on your average 35-year income
  • The difference between spousal and survivor benefits
  • Spousal and survivor benefits do not increase after the full retirement age

Brief about these facts of Social Security Benefits:

The ‘full retirement age’ depends on the year of your birth

While you might know that receiving your Social Security Benefits are more rewarding from or after you reach your full retirement age, do you know the actual full retirement age. While most of us consider 66 to be the full retirement age, the fact is that the actual age depends on the year we are born. If you are born in 1938 or earlier, your full retirement age is 65 years. If you are born between 1943 and 1954, your full retirement age would be 66 years and if you are born after 1960, the full retirement age is actually 67 years. Did you know this?

Getting benefits after divorce

If you are divorced from your spouse and want to lay a claim to spousal benefits of your ex-spouse, you have to fulfill three important criteria. One, you should remain unmarried for claiming the benefit. Two, your marriage should have lasted for at least 10 years. Three, your spouse should be retired or disabled. However, if you and your spouse are above 62 years of age and have been divorced for more than 2 years, you can start receiving spousal benefits even if your working spouse has not opted for the same.

The Social Security Benefits are calculated on your average 35-year income

Though the computation of Social Security Benefits varies as per different situations, one thing is constant. The number of years taken for your aggregate earnings is 35 years. If you have worked for more than 35 years, the highest earning years are considered in the calculation. However, if you have worked for less than 35 years, ‘zero’ value is taken for such years when your income was nil. This, therefore, reduces the value of the benefits you can receive.

The difference between spousal and survivor benefits

You get spousal benefits being married or being divorced. In either case, your spouse should be alive. However, if your spouse dies, you get survivor benefits. Spousal benefit is 50% of the Social Security Benefit which your spouse is entitled too while survivor benefit is 100% of that amount. When claiming either benefit, you can get only one– either yours or your spouse’s. In case of spousal benefit, if your benefit is more than 50% of your spouse’s benefit, you would get the higher amount, i.e. your benefit. The same holds true in the opposite scenario where you would get your spousal benefit. In short, when claiming spousal benefits, you can claim only one benefit and let go of the other. In survivor benefit, though, you can collect your survivor benefit and let your own benefit to grow.

Spousal and survivor benefits do not increase after the full retirement age

Though you can increase your Social Security Benefit if you delay receiving it post your full retirement age, no increment is available in case of spousal or survivor benefit.

Did you know these things about Social Security Benefits? I bet you didn’t. Wise men say that knowledge is power and they are not wrong. You should learn the nitty-gritties of Social Security Benefits too so that you can avail the maximum possible benefits.

Individual Retirement Arrangements – Do you want savings for the future + less taxing?

Individual Retirement Arrangements – Do you want savings for the future + less taxing?

Individual Retirement Arrangements – Do you want savings for the future + less taxing?

Retirement is that phase of our lives when, though we incur lifestyle expenses, our income stream has either stopped or has trickled down.

To meet the ever increasing expenses, a retirement corpus becomes a necessity.

If you are employed, the chances are that your employer has made retirement provisions for you. If you are self-employed, you make your own retirement arrangements. In fact, even salaried employees make their own retirement arrangements? Why, you must wonder. Well, who doesn’t like saving for their future and also save tax in the process?

Individual Retirement Arrangements (IRAs) are like retirement savings accounts.

You can save money in IRAs and use the money to invest in various saving instruments.

IRAs help in creating a retirement corpus while at the same time save taxes. Let us understand how IRAs work –

IRAs are of two types. One is the traditional IRA and the other is the Roth IRA.

Traditional IRAs in case of traditional IRAs, the contributions you make are tax exempted. It means that you can claim tax exemption on the contribution made to traditional IRA. Later, when you withdraw from the account, the proceeds would be taxable. Thus, traditional IRAs help in deferring your taxes. You pay taxes not on your contributions but on your withdrawals.

Roth IRAs Roth IRAs are completely opposite from traditional IRAs. In this instance, the contributions you make are included in your taxable income. Thus, you don’t get any tax relief on your contributions. Withdrawals, on the other hand, are tax-free.

You can have both types of IRAs for retirement funding. However, the contribution to both or one account is limited in nature. For 2017, you can make a total contribution of $5500 to any one or both IRAs.

IRA contributions and taxes

Contributions to Roth IRA are a part of your taxable income. So, you cannot claim tax deduction on them. In case of traditional IRAs though, you can claim deduction from your taxable income on your contributions. However, the amount of tax deduction available on your contributions depends on whether you or your spouse has an employer-sponsored retirement plan and the following factors:

  • Your filing status
  • Your Modified Adjusted Gross Income (MAGI)

Let’s see how:

If you or your spouse are covered by an employer sponsored retirement plan –

Filing Status MAGI
Single or Head of Household Less than $62,000 – up to $5500
Higher than $62,000 but lower than $72,000 – partial deduction
$72,000 and above – no deduction
Married filing jointly or qualifying widow(er) Less than $99,000 – up to $5500
More than $99,000 but less than $119,000 – partial deduction
$119,000 and above – no deduction
Married filing separately Less than $10,000 – a partial deduction
$10,000 and above – no deduction

If you are not covered by an employer sponsored retirement plan –

Filing Status MAGI
Single, Head of Household or qualifying widow(er) Full deduction till the contribution limit of $5500 for any amount of MAGI
Married filing jointly or separately where the spouse is not covered by an employer sponsored retirement plan Full deduction till the contribution limit of $5500 for any amount of MAGI
Married filing jointly where the spouse is covered by an employer sponsored retirement plan Less than $186,000 – up to $5500
More than $186,000 but less than $196,000 – partial deduction
$196,000 and above – no deduction
Married filing separately where the spouse is covered by an employer sponsored retirement plan Less than $10,000 – a partial deduction
$10,000 and above – no deduction

IRAs help you create a retirement corpus and also provide tax reliefs either immediately (in case of traditional IRAs) or when you withdraw (in case of Roth IRAs). So, make the most use of IRAs to create savings for your future and also save you tax.

Things You Didn’t Know About Rental Real Estate Income

Things You Didn’t Know About Rental Real Estate Income

Things You Didn’t Know About Rental Real Estate Income

Having a spare property which you can give out on rent is a very good opportunity of earning additional income. In fact, for some, real estate forms a part of  their only source of income.

Renting and leasing property brings in income and such income is, obviously, subject to taxation.

While you might know that your rental income is included in your taxable income and you pay tax on it, there are some aspects of this rental real estate income which might escape your attention. When it comes to filing your taxes correctly, any error might result in either high taxes or high penalties. Do you want to be a victim of either of these?

I hope your answer is a firm ‘No’ because mine definitely is. So, here are some facts which you might not have known about your rental real estate income:

Your accounting basis determines the inclusion of the rental income in your tax returns

There are two bases of accounting. One is the cash basis wherein transactions are accounted on the date when cash is received or paid for them irrespective of the actual date of such transactions. Other is the accrual basis where you record transactions on their actual date irrespective of when you receive/pay cash for them. For instance, for a transaction done in November where cash is received/paid in December, the cash basis would record the transaction in December while the accrual basis would record the transaction in November itself. In case of rental income too the same concept applies.

If you follow the cash basis of accounting, record your rental income in the tax return in the year you receive it.

For accrual basis, record it in the year for which the rent would accrue.

Tax treatment of advance rent and security deposits

Advance rents are always included in your return on the cash basis irrespective of the accounting basis you follow. In case of security deposits, there are two situations.

If you intend to use the entire security deposit as final rent payments, it becomes an advance rent.

In this case you should include it in the year when you receive the deposit. However, if you intend to return the security deposit at the end of the lease, do not include it in your tax return. If you ultimately return it there was no income on your part. But, if you use any part of the deposit or the total deposit for meeting the rent or any other payment from your tenant, you should include the money used in that year’s tax return.

Rental income can also be in kind

While most of us associate rental income to be in cash, your tenant might also render you some services or pay your rent in kind. Does this mean your income would not be taxed? Alas, no!

Rental income received in kind or by way of a service is also an income and is taxable.

To assess the absolute value of such income, use the Fair Market Value approach. The Fair Market Value of the service or the item received against rent payment would be your rental income for taxation purposes.

Using the property for both personal use and for renting

While you might usually rent out your property, at times, you might use it for personal use as well. In this case, the tax treatment of rental income would be different.

The periods for which the unit was used for personal use and for which it was rented would be used to determine whether or not the rental income would be chargeable to tax.

If, in a month, you used the property for personal use but rented it out for more than 15 days, the entire rental income should be included in your tax return. If, however, you rented it out for less than 15 days and also used the property for yourself, the rental income would not be taxable.

Did you know these facts? I bet you didn’t. Well, these are some common things which we don’t know about rental real estate income and so we err when filing our returns. So, understand these technicalities before you file your return so that the returns are filed correctly and you pay the correct tax due.

5 Point Checklist for Claiming Moving Expenses

5 Point Checklist for Claiming Moving Expenses

5 Point Checklist for Claiming Moving Expenses

Changing your job for a vertical movement in your career or starting that first job is always a pleasant experience for all of us. While the former increases your income and strengthens your resume, the latter gives you financial independence. But what if a job change or a new job makes you relocate? Even if you get a job promotion or a job transfer, you might be asked to relocate to a new place. Relocation, though good, also involves expenses. The cost of moving your residence to a new city and setting up a new home, all incur expenses.

The IRS gives you tax exemption on these expenses. Yes, your moving costs, in the context of your job, are allowed as deductions from your taxable income.

Amazing, isn’t it? But, before delighting in the exemption, do you know that there are certain rules regarding this exemption. Yes, to avail moving expenses as a deduction, you have to be eligible for some qualifying criteria. Here is a 5 point checklist for claiming moving expenses as a deduction:

1. The move should be because of your occupation

Salaried employees should move only if their job demands it. For self-employed individuals, the moving expenses are allowed as tax deductible only if the move is undertaken for business-related purposes, i.e. for expanding your business or for starting a new business.

2. You should qualify for two tests

To avail deduction for your moving expenses, you should qualify for two tests which are as follows:

    • Distance Test – The new job location should be at least 50 miles farther than the distance between your old home and previous workplace. So, if earlier, your old workplace was 10 miles from your home, your new workplace should be at least 60 miles from your existing old home. To calculate the distance you should use the shortest possible route between the two places.
    • Time Test – Your relocation should match the start of your new job at the new location. You should start your new job and work full time for at least 39 weeks in the first 12 months of your move. However, if you start working at the new location before moving in, you can claim the moving deductions under special circumstances. If you qualify for both these tests, the moving expenses would be tax deductible.

3. The moving expenses should qualify for tax deduction

Though the IRS allows moving expenses as a deduction, such expenses should be qualifying expenses in the sense that they are reasonable and essential for relocation.

Some qualifying moving expenses include:

    • Cost of gas incurred when travelling to the new location using your vehicle
    • Other travelling expenses like toll taxes, etc.
    • Short-term storage required for storing your household goods
    • Rent paid to trucks for moving your household articles
    • Expenses incurred on buying packing boxes and cartons
    • Cost of lodging incurred if travelling a long distance, etc.

Non-deductible expenses include:

    • Expenses on trips taken for house hunting prior to moving
    • Improvements made to home
    • Mortgage penalties
    • Temporary lodging before moving permanently
    • Cost of meals purchased when moving to new location, etc.

Check if your expenses qualify for deduction or not.

4. Checking the reimbursement received from employer against actual costs

Your employer usually pays for the expenses incurred on relocation through reimbursing the costs incurred. If the reimbursement you receive from your employer is higher than the actual expenses incurred, the excess would be taxable as a part of your income. If, however, the reimbursement is lower than the actual costs incurred, the actual expenses incurred would be deducted as moving expenses.

5. Reporting of qualifying moving expenses

After you know which expenses can be availed as deduction, you should file it correctly with your tax return. IRS Form 3903 is required to be filled in and filed for claiming moving expenses. Line 1 of the Form requires the storage and shipping costs. Line 2 should be filled in with the costs of travel, gas and lodging (if sought). Line 4 contains the amount of reimbursement received from your employer. So, fill in the form correctly and submit it with your tax return.

The IRS does not have a limit on the amount of moving expenses which can be availed as deduction.

If you relocate for work purposes, the entire qualifying expenses incurred would qualify for deduction. Follow this checklist for a complete guide to claiming your moving expenses as deduction and lower your tax liability.

Tax Payers, You Need To Know About AMT!!!

Tax Payers, You Need To Know About AMT!!!

Tax Payers, You Need To Know About AMT!!!

Are you earning a handsome income? Do you belong to the upper-middle class society? If you answered ‘Yes’ to these questions, you must be aware of the Alternative Minimum Tax rule when you file your federal income tax.

AMT was introduced to enable high-income generating individuals to pay higher taxes as they often benefitted from tax deductions and exemptions allowed.

AMT recalculates the taxable liability of such individuals using a different method which increases the tax outgo. So, do you know what Alternative Minimum Tax (AMT) is?

What is Alternative Minimum Tax?

Alternative Minimum Tax, or AMT as it is popularly called, is a method of computation of taxable income which is different from the regular computation methods.

While the regular income tax computation method provides tax exemptions and deductions in various aspects, the AMT computation method does not allow many of these deductions and exemptions.

It recalculates the taxable income adding back disallowed deductions and exemptions. So, AMT is a parallel, supplemental tax computation system for individuals with higher incomes.

How is AMT calculated?

The AMT calculation is different from regular tax computation. To calculate AMT, the following steps should be taken:

Step 1 ascertain your Adjusted Gross Income (AGI) for the year if you have not itemized your deductions.

Step 2 deduct the itemized deductions allowed for AMT computation. Such deductions include:

  • Medical expenses and dental expenses which are more than 10% of the AGI
  • Donations to charity
  • Interest in AMT investments up to net AMT investment income
  • Qualified housing interest
  • Casualty losses
  • Other miscellaneous deductions which are not subject to the 2% of AGI limitation, etc.

Step 3 you get the Alternative Minimum Taxable Income (ATMI)

Step 4 subtract the allowed AMT exemption to arrive at the final taxable liability. The AMT exemption limit changes every year and is different for different filing statuses. For the year 2016, the AMT exemption limits are as follows:

Filing Status AMT Exemption Limit
Single and Head of Household $53,900
Married filing separately $41,900
Married filing jointly and Qualified $83,800
Widow/Widower Description

Step 5 the income post the deduction of AMT exemption is then taxed. This tax is progressive in nature. The first $186, 300 of the taxable income is taxed @ 26% and any income exceeding $186, 300 is then taxed @ 28%.

Step 6 the aggregate tax computed above is called the Tentative Minimum Tax (TMT). If the TMT is higher than the tax liability computed using the regular process, you have to pay the full TMT.

How AMT differs from regular tax computation?

The process of calculating AMT is very different from the process of calculating the normal tax liability. When calculating AMT, personal exemption (valuing $ 4050) cannot be claimed this is allowed under normal tax computation. Also, various deductions which were allowed in normal tax computations are to be added back to the income as they are not allowed in ATM computation. For instance, the tax-exempt interest from private activity bonds is taxable under AMT as is the difference between the fair market value and the strike price of Incentive Stock Options. State and local income taxes, investment expenses, mortgage interest on home equity debt, medical expenses, etc. are not deductible in AMT computations.

Even your passive income and losses, net operating loss deduction and foreign tax credit are recalculated as per AMT rules.

These adjustments highlight the difference between AMT and regular tax computation methods.

So, to conclude, if you are earning good, calculate your AMT when you file your taxes. Form 6251 helps in calculating your AMT liability and should be carefully filled in. If you are confused, take the help of a tax professional but ensure that you file your returns correctly so that you don’t end up owing the IRS and incurring a penalty for the same.