Estrella Tax Services

Age Brings New Issues in Tax Filings
Source: The State (Columbia, S.C.)
Publication date: 2003-03-24

Mar. 24--Jim Presley, an Irmo businessman, shares his concerns about the issues he faces as an older taxpayer. He said he used to prepare his taxes himself, but no longer has the time.

Jim Presley never minded doing his own tax return. But once he began withdrawing 401(k) money to run his business, he decided it was time to turn to a professional.

Presley, a self-employed executive recruiter who lives in Irmo, said he's seen a slew of new tax issues come up as he nears age 65.

"I used to do my taxes myself, but I just don't have the time now with everything that's involved," said Presley, 63. "Besides, using a tax preparer allows you to let somebody else clean up your mess." Squaring up with Uncle Sam can be complicated for nearly all taxpayers, but many seniors face new tax issues when it comes time to file, including estate planning, gifting and retirement plan distributions.

Adding to the difficulties are recent changes to estate tax law, which are being phased in over the next few years, but aren't necessarily permanent.

"The tax laws are pretty complicated, but they're especially so for seniors," said Jay Swearingen, a partner with the Columbia accounting firm of Bauknight Pietras & Stormer.

Among tax issues seniors might need to consider:

Social Security benefits are taxable for many individuals who have income from other sources.
Medical expenses are only deductible when they exceed 7.5 percent of adjusted gross income.
Lower-income individuals 65 and older might qualify for the "Credit for the Elderly," a dollar-for-dollar reduction of tax bills with a maximum credit of $1,125.

Among the biggest surprises for retired couples: Social Security is taxable if their combined income hits $32,000.

"With interest (income), retirement income and Social Security, that's not hard to reach," said Alberta Wasden, an accounting practitioner in Wagener.

Once a couple reaches the $32,000 threshold, up to 80 percent of their Social Security income becomes taxable. If they haven't had any federal taxes withheld, it becomes a double shock, Wasden said.

"Most retirees are aware they can only earn a certain amount without being penalized, but they forget the $32,000 combined-income rule," she said.

And self-employment taxes are due from everyone who works for himself or herself, at any age, Wasden said.

Presley, who helps run Manufacturing Resource Professionals in Columbia, said the complexity of his tax return increased significantly once he began withdrawing 401(k) money for his business.

"It was tax-free going in, but of course it's taxable when I take it out," he said.

Tax planning for seniors has gotten considerably more complicated the past couple of years with the ongoing repeal of the estate tax, which currently hits individuals with more than $1 million in assets.

The exemption increases to $1.5 million next year, $2 million in 2006 and $3.5 million in 2009. Estate taxes are to be eliminated in 2010, but the following year it will revert to a $1 million threshold unless Congress moves to make the phaseout permanent.

"If you have less than $1 million, the estate tax is not an issue, but if you have more than $1 million, you need to give this some thought," Columbia tax attorney David Sojourner said.

For those looking to reduce wealth, individuals can gift up to $11,000 annually per person, added Sojourner, of the firm Ellis Lawhorne & Sims.

Seniors uncertain about taxes can often turn to professionals such as CPAs or estate planning attorneys to get an initial assessment for no charge.

"We're happy to listen and try and make an honest recommendation about what we think will work best for them," said Swearingen, the Columbia CPA.

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