Sunday, January 15, 2006

taxes

For the most part federal taxes for the older generation are similar to those for the rest of the population. There are, however, a few points that taxpayers over age 65 should keep in mind, and one of these concerns tax credits that may be available under specified circumstances. These include: the credit for dependent care expenses, the earned-income credit, and the senior tax credit. A tax credit directly reduces the amount of tax owed, whereas a tax deduction reduces the amount of income on which the tax is based. Generally, there is more benefit from a tax credit than a tax deduction.
Under 1986 tax laws, the following requirements qualify for dependent credit:
One's expenses for a dependent, such as an incapacitated parent or spouse, must be to allow one to work or look for work
One must have income from work during the year. Unpaid volunteer work or volunteer work for a nominal wage does not qualify
One (and one's spouse, if one is married) must keep up a home that one lives in with at least one qualifying dependent parent or spouse
One must file a joint return if one is married, and
One's payments for dependent care must be made to someone other than a person whom one claims as one's dependent, although one may include payments made to relatives for care even if they live in one's home, provided the relatives are over 19 years of age.
The tax code places specific restrictions on the amount of the work-related expenses that qualify for the dependent care tax credit and also limits the amount of expenses that can be used to calculate the credit. Therefore, it is essential to carefully examine the IRS rules.
The earned-income tax credit (EITC) has been traditionally used only by low-income workers who have dependent children and maintain a household. But adults who are caring for both a dependent child under age 19 and a frail parent may also qualify if their income is under $10,000. Information about this credit is on the standard federal income tax form 1040. The IRS office can help to determine eligibility.
The senior tax credit is available to: Anyone 65 or older who received less than $5,000 a year in Social Security income ($7,500 for a married couple).
Anyone under age 65 who is permanently or totally disabled and receives taxable disability payments.
It is important to make the most of deductions and to obtain all the credits to which one is entitled. Everyone over age 65 should have a copy of "Tax Benefits for Older Americans" (#554). Call or write the local IRS office to obtain a free copy.
The American Association of Retired Persons provides a free tax preparation service through its Tax-Aide program. Local IRS offices and offices of Area Agency on Aging can help locate the nearest Tax-Aide office. When moving to another state, tax rates should be investigated since property taxes, income taxes, inheritance taxes, and sales taxes vary from state to state. State tax structure can have a significant impact on an individual's financial situation and estate. In addition to these credits, older taxpayers who are married should note that they get an additional standard deduction for each person if they do not itemize deductions, and that couples do not need to file for income tax payments if their income is below $10,400. The Internal Revenue Service also provides free tax assistance for the elderly, and questions that reflect status as a single person and variations in dollar amounts of the standard deduction can be answered through this service.
Under the present law, no taxes are assessed on the Social Security income of single people whose gross adjusted income is less than $25,000, while for married couples, Social Security income becomes taxable only when the adjusted gross income is $32,000 or more. In a home sale, people over age 55 may exclude from taxation any gain of $125,000 or less if they have owned and occupied the home for three out of the last five years; residents of nursing homes need to have owned and occupied the home for one out of the last five years. As with other taxpayers, elderly people have a tax exemption of $2,000 for the taxpayer and each dependent (in 1989 people filing a joint return with an income that exceeds $155,320 and single people with an income of $93,130 have the amount of the deduction reduced as income rises).
Averyt, A. Successful Aging. New York: Ballantine Books, 1987.

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