Nolo’s Essential Retirement Tax Guide Your Health, Home, Investments & More By Twila Slesnick, Ph.D., Enrolled Agent & Attorney John C. Suttle, CPA 1st edition Dear friends, Since 1971, Nolo has worked hard to help Americans get a fair shake from the legal system. How? By producing books, software, forms and a website that translate legal jargon into plain English, off er clear instructions for routine tasks and break down complex systems into easy-to-understand components. All of our publications are relentlessly researched and tested by a dedicated group of in-house legal editors. And when we come out with a new edition, you’ll know that it’s been thoroughly updated.  ere’s a reason why Nolo is not only the nation’s oldest, but also the most respected provider of legal information. Our mission, refl ected in everything we publish, is to give consumers and small businesses the best information available. 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But this text is not a substitute for personalized advice from a knowledgeable lawyer. If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea— consult an attorney licensed to practice in your state. Please note Nolo’s Essential Retirement Tax Guide Your Health, Home, Investments & More By Twila Slesnick, Ph.D., Enrolled Agent & Attorney John C. Suttle, CPA 1st edition FIRST EDITION NOVEMBER 2008 Editor LISA GUERIN Cover Design SUSAN PUTNEY Proofreading ROBERT WELLS Index THÉRÈSE SHERE Printing CONSOLIDATED PRINTERS, INC. Slesnick, Twila. Nolo’s essential retirement tax guide : your health, home, investments & more / by Twila Slesnick and John C. Suttle. 1st ed. p. cm. ISBN-13: 978-1-4133-0912-6 (pbk.) ISBN-10: 1-4133-0912-7 (pbk.) 1. Individual retirement accounts Law and legislation United States Popular works. 2. Old age pensions Taxation Law and legislation United States Popular works. I. Suttle, John C. II. Title. III. Title: Essential retirement tax guide. KF6425.S54 2008 332.024'0145 dc22 2008022977 Copyright © 2008 by Nolo ALL RIGHTS RESERVED. PRINTED IN THE U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. Quantity sales: For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. For academic sales or textbook adoptions, ask for Academic Sales. Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, CA 94710. Dedication is book is dedicated to Damien Arthur Suttle, 1981–2008. Acknowledgments anks to Nolo editor Lisa Guerin for using her keen intellect and sharp eye to help make this book the best that it can be, and to Acquisitions Editor Marcia Stewart for her hard work in helping us develop and organize the project. anks to Terri Hearsh for her attention to detail and for making the book look great. anks also to Durf for always being interested in what comes next; and to Mojdeh for her patience. CHAPter Table of Contents Your Retirement Tax Companion 1 Some Tax Basics Income 4 Deductions 11 Exemptions 17 Credits 18 Alternative Minimum Tax (AMT) 19 2 Your Home Loans Secured by Your Home 26 Real Estate Taxes 46 Home Improvements 49 Energy Credit 50 Solar Energy Credit 51 Casualty and eft Losses 52 Selling Your Home 58 How to Report Deductions and Gain From Your Home Sale 64 3 Your Business Business or Hobby? 69 Start-Up Expenses 71 Operating Expenses 75 Depreciating Assets 81 Home Office Deduction 96 Net Operating Loss 102 Self-Employment Tax 103 Self-Employed Health Insurance 104 Retirement Plans for Your Business 106 Individual Retirement Accounts 111 Earned Income Credit 117 4 Your Health Age and Blindness Deduction 121 Credit for the Elderly or Disabled 123 Health Savings Accounts 129 Medical Expense Deduction 135 5 Charitable Contributions and Volunteer Work Charitable Organizations 166 Cash Donations 167 Property Donations 171 Charitable Donations From an IRA 183 Gifts to a Donor-Advised Trust 185 Volunteer Work 186 Contribution Limits 188 [...]... income tax But above-the-line deductions also reduce your AGI A lower AGI is often to your advantage because AGI is used as a measuring stick for phasing out or even eliminating certain tax benefits: • The amount of your Social Security benefits that are subject to tax depends on your AGI If your AGI falls below a certain level, none of your benefits are taxable As your AGI increases, more and more of your. .. 58 Selling Your Home 58 Review the Settlement Statement 59 Calculate Your Gain 60 Exclusion of Gain 63 How to Report Deductions and Gain From Your Home Sale 64 24  |  Nolo’s Essential Retirement Tax Guide Tax Benefits in This Chapter ■■ Do you own your home? • You may deduct interest you pay on your mortgage and home equity loans, up... Gifts, Inheritances, and Surviving Your Spouse Gifts 363 Inheritances 373 If You Survive Your Spouse 378 Index Your Retirement Tax Companion T here was a time when the word retirement meant more or less the same thing to everyone: Quitting your job and taking it easy Simplifying your life and your finances Signing up for Social Security and Medicare In this... deductions, and exemptions that are most likely to apply in retirement, with an eye to those issues that are more likely to come up for you in the years after you’ve left your nine-to-five job, finished rearing your children, and moved on to new adventures Each chapter explains the tax ramifications of a particular issue or decision after retirement, such as your health, your family, or your investments. .. add up your income and subtract all of your deductions and exemptions, you calculate your tax, claim any credits you qualify for, and send your money to the IRS All done for the year, right? Not quite You might have to worry about the alternative minimum tax It comes as a surprise to many taxpayers that they must actually perform two tax calculations: one to compute their regular income tax, and the... don’t have to itemize your deductions and file Schedule A with your income tax return If you prefer, or if it saves taxes, you may simply claim the standard deduction, a fixed dollar amount that increases each year for inflation 14  |  Nolo’s Essential Retirement Tax Guide Although it is to your advantage to complete and file Schedule A when your itemized deductions exceed the standard deduction, you... under­ standing of how taxes work At the simplest level, of course, you must pay tax on your income But what counts as income for tax purposes? How do deductions, exemptions, and credits work? And are you going to have to worry about the alternative minimum tax? This chapter will help you answer those questions, so you can better understand the tax benefits associated with retirement issues and activities... Social Security benefits that is subject to income tax increases as your income increases However, you can never be taxed on more than 85% of your benefits For more information about calculating the amount of Social Security that is subject to tax, see IRS 6  |  Nolo’s Essential Retirement Tax Guide Publication 915, Social Security and Equivalent Railroad Retirement Benefits Social Security benefits are... deduction, you calculate your tax liability as follows: Taxable income before deduction: $ 60,000 Deduction for foreign taxes paid: $ Taxable income: $ 59,250 Total income tax due: $ 11,156 (750) If you claim a tax credit instead of a deduction, you calculate your tax liability like this: Taxable income: $ 60,000 Income tax before credit: $ 11,344 Less credit: $ Total income tax due: $ 10,594 (750)... accounts? Take a look at IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out, by Twila Slesnick and John C Suttle (Nolo), which explains the rules governing retirement plan distributions You’ll learn how to avoid penalties and minimize your tax liability while making the most of your retirement investments Chapter 1  |  Some Tax Basics  |  7 Investments If you inherited the thrifty gene from . CONSOLIDATED PRINTERS, INC. Slesnick, Twila. Nolo’s essential retirement tax guide : your health, home, investments & more / by Twila Slesnick and John C. Suttle. 1st ed. p. cm. ISBN-13: 978-1-4133-0912-6. 241 Taxes Paid to Other States 243 Foreign Taxes 243 8 Your Rental Property or Vacation Home Rental Property 251 Your Second Home 288 Your Vacation (Mixed-Use) Home 290 9 Personal Loans and Purchases Purchases. rearing your children, and moved on to new adventures. Each chapter explains the tax ramifications of a particular issue or decision after retirement, such as your health, your family, or your investments.