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Talking Taxes

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Talking Taxes


April 15 is the annual deadline for filing your federal and Pennsylvania State Income Tax returns. Now is a great time to use these documents to assess your financial situation and plan for your 2011 income tax bill. If you received a refund, do you know why? Take some time to review your return.


Let's start with your adjusted gross income. Do you expect your income to increase or decrease compared to last year? One way to decrease your AGI is to contribute to an employer sponsored retirement plan or contribute to a traditional IRA. Self-employed individuals also have the opportunity to contribute to several other types of retirement plans that allow for tax avoidance today.


Next consider how many personal and dependent exemptions you will have. Each household member is worth $3,650 in exemptions. In other words for a family of four - $14,600

Also consider your filing status. Married filing joint and under age 65 is $11,400, if both are age 65 or over $13,600.


Children under the age of 17 are worth $1,000 in child tax credit. If your child will turn 17 in 2011, your income tax bill could be increased by this $1,000. Children who are enrolled in college and meet certain guideline can qualify their household to receive up to $2,500 in the American Opportunity Tax Credit, $1,000 of which is refundable. In order to receive this credit the household must claim the student as a dependent - which parents can do as long as the student is under age 24 and considered a full-time student for at least 5 months of the year.


Retirement savers credit - if you meet income guidelines, contributions to employer sponsored retirement plans, traditional IRA's and even Roth IRA's can be included in calculating this credit which reduces your tax bill.


Earned income tax credit - whether you work for someone else or for yourself - if you have earned income and meet income guidelines, you may be eligible for this tax credit, even if you don't owe any federal income taxes!


Your 2011 federal income tax bill may be up to $800 more than your 2010 bill due to the expiration of the "Making Work Pay" tax credit. This credit was calculated as 6.2% of your earnings up to a $400 limit per worker. While you won't see it on the 2011 tax return, somewhat in lieu of this credit a change was made to your federal social security tax withholding. Normally the employee share of contributions made to Social Security is 6.2% of wages up to a certain income limit. For tax year 2011 ONLY, this has been reduced to 4.2%. You may have noticed a slight increase in your paycheck at the beginning of the year. Remember, come January 1, 2012, your check will be reduced by 2% as your contribution to Social Security will increase from 4.2% to the usual 6.2%.


Finally, if your refund includes paycheck withholdings, consider making adjustments to your W-4 form filed with your employer. Completing that simple form confuses many workers and the IRS is trying to make it less so. has a link to an online withholding calculator that will help you determine the correct income tax withholding for your situation. If you do decide to change your withholding to reduce the amount of taxes taken from each pay (stop paying taxes you don't owe!) also make plans for what you will do with this newfound money. These funds could be used to establish or increase your emergency fund, pay off credit card balances, pay off other types of debt or maybe even help fund a well-deserved vacation.


For more details on income taxation, check our extension website



The federal tax code allows individuals to save for their retirement with pre-tax money. You avoid taxes while you are working (and possibly in a higher tax bracket) and pay the taxes on the principal plus any interest or capital gains (but not at the capital gains rate since you avoided the tax bit up front) when you withdraw the money usually in retirement (when you possibly will be in a lower tax bracket). So because of this preferential tax treatment of retirement accounts (401K, 403B, Traditional IRA's) you are strongly encouraged to save and invest for your future retirement.

This tax deferral does come with a caveat. By the time you reach the age of 72 1/2 (and you need to read the IRS version to determine exactly when you need to take action) you are expected to take out a certain portion of your investments and pay the taxes on them. This amount is referred to as RMD or Required Minimum Distribution and is based on your retirement assets as well as actuarial figures. IF you fail to take the RMD, there is a 50% penalty of what you should have taken! (More specific details are available on the website) Because these are unique times, RMD for 2009 have been suspended with no penalty for those folks who are in a position to take advantage of this change.

Prior to leaving office, President Bush signed this legislation lifting the RMD requirement for 2009. You should have received information about this change from your retirement account holders. Many of the folks I work with can't take advantage of this legislation - our VITA project showed of the 300+ people we served, including a good majority of retirees, the Average adjusted gross income was under $13,000 PER HOUSEHOLD. But, if you are fortunate enough to be or know someone who is financially stable in retirement, they could take advantage of this provision. This change was brought about due to the Recession to allow folks to avoid "selling at a loss" - People whose retirement investments had lost considerable value would not be forced to sell at the bottom, but to try to ride out the low spot in the economic cycle.

Bottom Line: If you are or know of retirees who DO NOT need to take money from their retirement accounts in 2009 except for the RMD provision, ask them to consider researching the benefits of stopping payments for the remainder of 2009 and how their account holders will deal with their decision. For some retirees, they receive a monthly distribution while others receive an annual one. If they have already taken some distributions, it appears they have a 60 day lookback period where they could return any distributions received in that time frame. If they receive their distribution at the end of the year, they can take action now to prevent this payment from happening. Each household's situation is different so care must be taken to consider how this suspension of RMD for 2009 affects them.

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