The Federal income tax code has several rules that are triggered by your age. And, while birthdays are fun and simple, these tax rules can be extremely complicated. It is important to know how they apply to you.
Here are seven birthdays that can wind up changing your tax returns.
1. Age 19: Kiddie Tax
At age 19 (age 24, if you’re a full-time student), the “Kiddie Tax” provision ends. The Kiddie Tax is designed to prohibit a child’s unearned income — typically investments — to be taxed at a their (presumably) lower income tax rate and instead taxes them at the parents’ rate. For 2016, the first $1,050 unearned income is tax-free to the child. The next $1,050 is taxed at the child’s rate and any unearned income over $2,100 is taxed at the parents’ rate.
2. Age 50: Catch-Up Contributions
Anyone who is eligible to make contributions to a qualified retirement plan and has reached age 50 during the calendar year can add an additional amount called a “catch-up contribution” (if your employer allows it). This terminology is a bit confusing since there is no requirement to be “behind” in your plan contributions in order to be eligible to make the additional elective deferral.
While the limits are indexed annually, the 2016 limits were unchanged from 2015 and are as follows: 401K, 403B, SARSEP and 457B plans – $6,000; SIMPLE IRA and SIMPLE 401K accounts – $3,000; traditional or Roth IRAs – $1,000. There is no catch-up allowed for an SEP IRA.
While contributions to employer-sponsored plans are required to be made by Dec. 31, you have until your filing deadline for catch-up contributions to Traditional or Roth IRAs.
3. Age 55: Waiver of Penalties
A similar “catch-up” provision is allowed for Health Savings Accounts (HSAs) in the amount of $1,000. However, you must be age 55 to take advantage of this one.
As a general rule, distributions from a qualified retirement account prior to age 59½ are subject to a 10% penalty in additional to ordinary income tax. However, this penalty is waived if you are at least age 55 (age 50 for state public safety employees) in the year that you retire, quit or are fired from your employer. Since this waiver only applies to your company retirement plan, and not to IRAs, you should wait until you are at least 59½ to roll the funds over to an IRA if you want to take these early distributions.
4. Age 59½: Retirement Access
Once you reach age 59½ the 10% penalty on retirement plan distributions disappears. You can take as much or as little from your retirement plan as you want and just pay ordinary income tax. (Amounts allocated to after-tax contributions are never taxed when distributed.)
5. Age 62: Early Social Security Starts
You have been paying Social Security taxes for years and now it is time to claim your benefits. Age 62 is the earliest you can claim Social Security Retirement benefits. Keep in mind, however, that early benefits equals lower benefits. Anyone retiring in 2016 must be at least age 66 years old to receive full retirement benefits, and claiming at age 62 would permanently reduce those benefits by 25%.
How does this impact your tax return? Remember, Social Security Retirement benefits could be subject to taxation. To determine if they are, add ½ of your Social Security benefit to all of your other income, including tax-exempt interest. If the total is greater than $25,000 (for single and head of household), $32,000 (for married filing jointly), or $0 (for married filing separately) then the benefits will be partially taxable.
6. Age 70: Social Security Deferral Ends
If you decide to defer Social Security Benefits beyond your normal retirement age, the delayed benefits will increase by as much as 8% per year. However, these increases stop once you reach age 70 when you must start receiving benefits.
7. Age 70½: Required Minimum Distributions
You cannot defer retirement account distributions forever. Generally, you have to start taking Required Minimum Distributions (RMDs) from your retirement plans once you reach age 70½. (Roth IRAs, however, do not require lifetime withdrawals.)
The distribution amounts are based upon tables listed in IRS Publication 590-B. While you can take your first withdrawal in the year you turn 70½, the latest you can take it is April 1 of the following year. If you choose to wait until the following year, you will have to take both the first and the second distributions in that same year.
If you are still working, you can delay taking Required Minimum Distributions in your company’s 401K or 403B plan (and all other defined contribution plans) until you retire. This exception does not apply to any IRAs, SEP IRAs or SIMPLE IRAs.
If your plan permits it, you could roll your IRA into the company 401K and then defer RMDs on all of your retirement assets. The exception also does not apply to anyone who owns at least 5% of the company that sponsors the qualified retirement plan.
Before acting you should seek out professional guidance from a Certified Public Account or another qualified tax preparer.
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