Happy Birthdays from the IRS

13 – In the year that your child turns 13, only the day care expenses you paid for the child for the part of the year when he or she was under age 13 qualify for the Child Care Credit.

17 – You can no longer claim the Child Tax Credit on your return starting for the year that your child is 17 at year’s end. So, for the year of your child’s 17th birthday, no Child Tax Credit is allowed for that child.

18 – The year in which your child has their 18th birthday is the last year that the child is considered a qualifying child, unless the child is a student and under age 24. To qualify as a student for this purpose, during some part of each of any 5 calendar months of the year, your child must be:

• A full-time student at a school that has a regular teaching staff, course of study, and a regularly enrolled student body at the school; or 
  
  
• A student taking a full-time, on-farm training course given by a school described in the prior bullet, or by a state, county, or local government agency. 

The 5 calendar months don’t have to be consecutive, and a full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance.

If your older child isn’t a student under this definition, you might still qualify to claim the child as a dependent, but not as a qualifying child. The term for this type of dependent is “qualifying relative,” even though some individuals can qualify without being related to you. Three tests must be met before you can claim someone as your dependent if they aren’t a qualifying child:

24 – In the year that your child who is a student (as defined above) reaches age 24, the child is no longer a qualifying child for tax purposes and for you to be able to claim the child as a dependent on your tax return, tests A, B and C described above for a qualifying relative will need to be met. Losing the child as a dependent means that you would no longer be eligible to claim the higher-education credits (American Opportunity Tax Credit and Lifetime Learning Credit) based on the education expenses of that child.

24 – If you purchase U.S. Savings Bonds after reaching age 24, when you redeem the bonds and use the proceeds to pay qualified higher education expenses, such as tuition and fees, or contribute the funds to a Section 529 plan, you may be able to exclude the interest on the bonds from your gross income. However, the amount excludable may be reduced depending on your income when the bonds are redeemed.

25 – An ABLE (Achieving a Better Life Experience) account may be established by an individual if their blindness or disability occurred before age 26. Thus, only those who become blind or disabled no later than age 25 qualify for an ABLE account. Those eligible for an ABLE account are termed ABLE beneficiaries. Often the ABLE account is funded by the beneficiary’s parents or others. The total annual contributions to an ABLE account are limited to the annual gift tax exclusion amount ($16,000 for 2022), plus certain employed ABLE account beneficiaries may make an additional contribution. The contributions are not tax deductible but if the employed beneficiary contributes to the account, that individual may qualify to claim the so-called Saver’s Credit.

The idea behind ABLE accounts is to provide a way of supporting the account beneficiary in maintaining their health, independence, and quality of life. ABLE accounts shelter assets from means testing required by some government benefit programs. Distributions to the beneficiary are tax free if the funds are used for qualified expenses of the disabled individual.

25 – The youngest age at which a taxpayer with no qualifying children can qualify for the earned income credit is 25. If married and filing a joint return, only one of the spouses needs to be least age 25 at the close of the tax year. For 2021 only, the minimum age was dropped to 19 for most taxpayers.

50 – Once you reach age 50 you can make additional annual “catch-up” contributions to salary reduction plans, including 401(k) plans, provided the plan permits catch-up contributions. The allowable “catch-up” amount is indexed for inflation in $500 increments, and for 2022 is $6,500. If you contribute to an IRA, the catch-up amount for IRA owners is $1,000, and is not inflation-adjusted. Thus, the maximum contribution by a worker aged 50 or older to a 401(k) or similar plan for 2022 is $27,000 or to an IRA is $7,000.

50 – A special rule applies for public safety employees aged 50 or older: If you withdraw funds from a government defined benefit pension plan and you are a qualified public safety employee who separates from the job after age 50, the 10% early withdrawal penalty (see “59½” below) does not apply to the original distribution from the plan. However, if the funds are rolled into an IRA or a defined contribution plan, any subsequent distribution (until you reach age 59½) is subject to the 10% penalty. A public safety employee is defined for this purpose as:

• Any employee of a State or political subdivision of a State who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of that State or political subdivision, or 
  
  
• Any Federal law enforcement officer, Federal customs and border protection officer, Federal firefighter, or any air traffic controller.

55 – Starting in the year you turn age 55, you may be able to take a distribution from a qualified retirement plan (not an IRA) and avoid an early withdrawal penalty. This exception applies only where you separate from employment (i.e., stop working for the employer that is sponsoring the plan) after reaching age 55, and won’t apply if you retire from your job before turning 55 but wait until after your 55th birthday to take the distribution from the plan. Said another way: You must be age 55 or older, and then separate from employment, for an early distribution to be excepted from the 10% penalty.

59 1/2 – A 10% tax (penalty) applies to premature (also termed early) distributions from traditional IRAs and qualified retirement plans, such as 401(k)s and others. This penalty applies to distributions made before you reach age 59½ (but see “55” above for an exception) and is 10% of the part of the distribution that you would be required to include in your income for the year of the distribution. There are several exceptions to the penalty – some available only for IRAs or only for employer plans, some for both types of retirement vehicles – that aren’t covered in this article. If you plan to make a traditional IRA or retirement plan distribution between your 59th and 60th birthdays, be sure to do it after you reach 59½. If you take the distribution too soon, you could owe the early distribution penalty.

62 – When you reach age 62 you may be eligible to receive Social Security benefits. Once you start claiming your benefits, whether at 62 or a later age, you should be aware that up to 85% of those benefits could be taxed. You may want to have the Social Security Administration withhold income tax from your monthly benefit payment or you may need to make estimated tax payments.

65 – In the year you turn 65 and each year thereafter, and if you do not itemize your deductions on your tax return, you will be entitled to an additional standard deduction amount. This amount is indexed for inflation. For 2022, this extra amount is $1,400 if you are married, whether you use the joint, married separate or qualifying widow(er) filing status, or $1,750 if you file as single or head of household. If married, and your spouse is also age 65 or older, each of you qualifies for the extra amount. There’s no need to prorate the additional amount for the year of your 65th birthday.

65 – An individual with no qualifying children cannot claim the earned income credit starting with the tax year in which they have their 65th birthday. For 2021 only, the maximum age limitation was waived.

70 1/2 – This half-birthday marks the point from which you can make a nontaxable qualified charitable distribution (QCD) from your traditional IRA of up to $100,000 per year. This distribution needs to be made directly by the IRA trustee to an eligible charitable organization for the distribution to be tax free. However, you won’t be able to claim a charitable deduction for the amount that is a QCD.

Distributions to a private foundation or a donor-advised fund aren’t eligible. If filing a joint return and both you and your spouse have an IRA, the $100,000 limitation applies to each of you. Caution: be careful on the timing since a distribution from an IRA made to a charitable organization in the year you turn 70½, but prior to the date you reach age 70½, is not a qualified charitable distribution and would therefore be taxable.

72 – To prevent an individual from investing in tax-deferred retirement plans, including a traditional IRA, but never withdrawing from the plan, the account owner is REQUIRED to take a MINIMUM (as calculated per IRS regulations) DISTRIBUTION (RMD) beginning in the year the IRA owner reaches the mandatory beginning age, which is currently 72. For the first distribution year, you are allowed to put off the distribution to as late as April 1 of the following year.

Distributions from your IRA don’t count toward the RMD you must take from your 401(k) or another employer plan, and vice versa.

72 – Legislation enacted in the last few years permits taxpayers with earned income to continue contributing to their IRAs regardless of their age. Previously, contributions couldn’t be made once the IRA owner became 70½, which for decades was also the age that RMDs had to begin. Even though you may make a traditional IRA contribution at age 72 or older, you will still be required to take an RMD.

So now we have a complication when you can make a traditional IRA contribution and a qualified charitable distribution (QCD) after reaching age 70½. In this scenario if you make a QCD you are required to reduce the amount of the QCD that is nontaxable by any traditional IRA contribution you made and deducted after reaching 70½, even if the IRA contribution and QCD are not in the same year.

85 – If you want to stretch out your retirement funds, you are allowed to use up to the lesser of 25% or $145,000 (2022 limit) of your retirement account to purchase a qualified longevity annuity contract (QLAC) within the account. The amount used to purchase the QLAC is subtracted from the account balance and would thus reduce the RMD from the retirement account each year until a specified time in the future, but no later than age 85, when distributions must begin from the annuity.

There isn’t space in this article to include all the details related to the numerous tax benefits and rules that apply for the birthdays listed. If you have questions or would like more information about any of them, please contact this office.