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March 9, 2006
Tax season is in full bloom now, and that is a good thing. The days are getting longer and before too long I will leave for Florida to recover from another tax season. But, before I leave for Florida there are a few tax tips that I would like to share with you.
First, for those of you who are over age 65, and either own or rent your home, FREE CASH IS AVAILABLE, if you meet the guidelines. This FREE CASH program is also known as the Massachusetts Senior Circuit Breaker Credit. In order to get this FREE CASH, you must file a Massachusetts income tax return. Residents of subsidized housing units are not eligible for this Circuit Breaker Credit.
HOW TO GET YOUR FREE CASH - Generally, this credit is available to those who don’t make enough to file a tax return and, to a lesser extent, those who make enough to file but have total income of less than $67,000. Total income for this purpose includes items not taxable in Massachusetts such as social security and other non-taxable items. For tax year 2005 the maximum refund available, regardless of whether you had any income tax withheld, is $840. For tax year 2004 the maximum refund was $810.
If you were not planning on filing income taxes this year because you did not have enough income, and have changed your mind in order to claim the senior circuit breaker credit, call me. I will prepare your income tax return and electronically file it for FREE. Last year I provided the same service and got over $34,000 in tax refunds for people who were entitled to this refund. In just the past two weeks we have processed over $20,000 in circuit breaker refunds for Massachusetts taxpayers from Beverly to Cape Cod and everywhere in-between. For information on this free tax preparation service for those over 65 and eligible for the senior circuit breaker credit, please call me at the Elder Law Center, (781)233-4444.
In order to get the refund you have to file a tax return. Some people think that in order to get a refund, you need to have had some tax withheld or paid in. That is not true. You can get this credit by filing a return. 2001 was the first year that this credit was available. It’s too late to go back and file for 2001, but it’s not too late to file for 2002, 2003 and 2004. You could get up to $2,420 in refunds in total for those 3 years. Usually, if you are eligible for the credit in the current year, you were probably eligible in the prior years also. I’m sure that you or someone that you know has not filed income taxes because they didn’t earn enough. These people are entitled to this FREE MONEY.
TAX PROBLEMS WITH IRA’S - The most common income tax mistake that I see with IRA’s is failure to calculate how much of your IRA income should be excluded from your Massachusetts income tax return. The general rule for traditional IRA’s is that you get a tax deduction when you make a contribution into your IRA and when you start to make withdrawals, the full amount is taxable. The problem arises because this is the rule for federal tax purposes and not Massachusetts. On your Massachusetts income tax return, you never got a deduction for your IRA contribution, and this means that until you receive back more than what you contributed, none of your IRA income should be taxed in Massachusetts. IRA’s have been around since the early 80’s, so to properly compute your Massachusetts income tax return and pay the lowest tax possible, you will have to add up all of the contributions that you have made over the years. This becomes your “cost” and until your recover all of your “cost”, none of the IRA should be taxable in Massachusetts. Here is an example:
Example: Joe has made $10,000 in contributions to his traditional IRA over the years. Joe’s IRA is now worth $50,000. Joe retires in 2006 and decides to take $5,000 per year from his IRA. Joe receives $5,000 from his IRA in 2006 and 2007. How much is taxable in Massachusetts?
The answer is none. Because Joe contributed $10,000 to his IRA and was never entitled to a deduction in Massachusetts for those contributions, none if his IRA distributions will be taxable until tax year 2008 at which time he will have fully recovered his “cost”.
Please note that we are talking about traditional IRA’s here. If you had a company 401K or some other company pension plan and rolled-over that pension plan amount to an IRA, then all distributions that you receive will be taxable on both your federal and Massachusetts income tax returns. This is because under the 401K or pension plan, you got a tax deduction on both your Federal and Massachusetts income tax returns, so when you receive distributions from these types of IRA’s, it’s all taxable.
THE DISAPPEARING HEAT DEDUCTION - I have just discovered a problem with the new heat deduction for Massachusetts. It was implemented to try and help those with income under certain levels pay for heat this winter. Single taxpayers must have income less than $50,000 and all others must have income less than $75,000. I have found that Massachusetts taxpayers whose income is low enough to qualify for a limited income credit do not benefit from this deduction. It appears that by claiming the heat deduction, your limited income credit is reduced by exactly the same amount resulting in the same refund whether you claim the deduction or not. I doubt that this was intended by the legislature. Could it be a problem with my tax software? I plan on bringing this up with our legislators to see if we can get that fixed.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org