Tax Provisions Facing Federal Annuitants

Some Important Tax Provisions Facing Federal Annuitants Preparing 2019 Tax Returns

Edward A. Zurndorfer

Federal annuitants must pay particular attention to certain tax provisions with respect to preparing their 2019 income tax returns. Among these tax provisions are taxation of retirement income and Social Security benefits, the deductibility of certain medical expenses, and a new filing form for retirees over age 65 during 2019. This column discusses these issues.

It is important to first discuss what amount of gross income requires a retiree to file a 2019 federal income tax return. Since a higher standard deduction is allowed for individuals age 65 or older, the income level at which a return is required are greater for individuals over age 65. The following table summarizes the minimum gross income filing amounts:

Filing Status Must File if Gross Income Is:
Single $13,850
Married Filing Jointly (MFJ):
One Spouse Over 65
Both Spouses Over 65
 
$25,700
$27,000
Married Filing Separately (MFS) $13,500
Head of Household (HOH) $20,000
Qualifying Widow(er) (QW) $25,700

Taxation of Social Security Benefits

Social Security recipients may have to include up to 85 percent of Social Security benefits (paid because of retirement, survivorship or disability) as part of their gross income. The amount of benefits includable in gross income depends on whether the recipient’s provisional income exceeds the “applicable base amount”. Provisional income is calculated as follows:

Calculation of Provisional Income

Begin with: Adjusted gross income (before taxable Social Security benefits).

Add: 1) One-half of social security benefits. +

2) Tax-exempt interest. +

3) Excluded Series EE and I bond interest used to pay college expenses. +

4) Excluded employer-provided adoption assistance benefits. +

5) Excluded foreign earned income and housing costs.  +

6) Excluded income of certain bona fide residents of American Samoa or Puerto Rico. +

7) Student loan interest deduction. +

8) Tuition & fees deduction.

Equals: Provisional Income

Social Security recipients may have to include up to 85 percent of Social Security benefits in their gross income depending on whether their provisional income exceeds the applicable base amount, as shown below:

Taxation of Social Security Benefits- Relationship of Provisional Income to Base Amounts and Adjusted Base Amounts

Filing StatusBase AmountAdjusted Base Amount
Single, HOH, QW, or MFS & the taxpayer didn’t live w/ spouse at any time during the year$25,000$34,000
MFJ$32,000$44,000
MFJ & the taxpayer lived w/ spouse at any time during the year$0$0

· None of the taxpayer’s Social Security benefits are taxable if provisional income does not exceed the base amount.

· Up to 50% are taxable when provisional income exceeds the base amount but is less than the adjusted base amount.

· Up to 85% are taxable if provisional income exceeds the adjusted base amount.

Taxation of Federal Retirement Plans

Most federal employees contribute to the Thrift Savings Plan (TSP). There are two types of TSP accounts that an employee can contribute to, namely: (1) Traditional TSP in which all distributions are fully taxable; and (2) Roth TSP in which distributions are not taxable provided the distributions are “qualified”. A Roth TSP participant can make a qualified distribution provided two conditions are met, namely: (a) the Roth TSP participant is over age 59.5, and (b) it has been at least five years since Jan. 1 of the year that the Roth TSP participant made his or her first Roth TSP contribution.

For those employees covered by FERS, all agency automatic (one percent of an employee’s SF50 salary) and matching TSP contributions are fully taxable.

Upon retiring from federal service, a federal employee will receive either a CSRS or a FERS annuity. Both CSRS and FERS employees contribute a portion of their salaries to their respective retirement each pay date. These contributions are made with after-taxed dollars. Employee CSRS or FERS contributions are returned as part of a monthly annuity and are a nontaxable return of basis. CSRS and FERS annuities are taxed according to the IRS’ Simplified Rule as will be explained in a future FEDZONE column.

Annuity Payments – Commercial and Other Nonqualified Plans

The IRS’ “Simplified Method” used to compute the taxable portion of a CSRS or FERS annuity cannot be used for: (1) nonqualified plans such as nonqualified employee plans or commercial annuities; and (2) individual retirement accounts or annuities. For these annuity payments, the taxable and nontaxable portions of each payment are computed using the IRS’ General Rule.

Standard Deduction

Individuals age 65 or older or who are blind get a higher standard deduction amount.

An individual is entitled to a higher standard deduction if he or she is age 65 or older at the end of the year. An individual is considered 65 on the day before his or her 65th birthday. This means that the standard deduction is higher when filing 2019 federal income tax returns for individuals born on or before January 1, 1955.

An individual who is blind on the last day of the year is also entitled to a higher standard deduction. To qualify, the individual must be totally or partially blind.

A higher standard deduction is available if the individual’s spouse is age 65 or older and: (1) a joint return is filed, or (2) separate returns are filed but the individual can claim an exemption for his spouse because the spouse had no gross income and the exemption for his or her spouse could not be claimed by another individual.

The following chart shows the standard deduction amounts for 2019 for individuals age 65 or older and/or blind.

2019 Standard Deduction Chart for Individuals Born On or Before January 1, 1955, or Who Are Blind

Check the correct number of boxes below/ then go the chart.

TaxpayerBorn On or Before 01/01/1955
Blind
Spouse (if claiming spouse’s exemption) Born On or Before 01/01/1955
Blind

TOTAL NUMBER OF BOXES CHECKED?

Filing StatusNumber of Boxes CheckedStandard Deduction=
Single1
2
$13,850
$15,500
Married Filing Jointly or Qualifying Widow(er) w/ dependent child1
2
3
4
$25,700
$27,000
$28,000
$29,600
Married Filing Separately1
2
3
4
$13,500
$14,800
$16,100
$17,400
Head of Household1
2
$20,000
$21,650

Medical Expenses

Federal annuitants are likely to incur potentially deductible medical and dental expenses. Also, a parent’s medical expense paid by a child can be claimed by the child if the parent could be claimed as a tax dependent of the child if not for the gross income requirement. The following discussion highlights particular medical expenses that often apply to the elderly.

When Are Medical Expenses Paid?

Medical and dental expenses normally are deductible in the year paid – regardless of when the medical and dental services were provided. The following table summarizes:

Payment Method Date of Deemed Payment
Check Date mailed/delivered
Pay-by-phone Reported date shown on statement of financial institution
Online Account Reported date shown on statement of financial institution
Credit Card Date of credit charge

Medical Insurance

Insurance premiums paid for insurance policies that cover some type of medical, dental, vision and long-term care expenses.

Federal employees who are enrolled in the Federal Employees Health Benefit Program (FEHBP) and/or the Federal Employee Dental and Vision Insurance Program (FEDVIP) have their FEHBP premiums and FEDVIP premiums deducted from their gross salary. In other words, premiums are paid with pre-taxed dollars and are not includable as medical expenses on one’s tax return.

On the other hand, federal annuitants always have their FEHBP and FEDVIP premiums deducted with after-taxed dollars from their annuities and therefore can include these premiums as part of medical expenses on their tax returns.

Medicare Care Premiums

Medicare Part A. The payroll tax paid for Medicare Part A (1.45 percent of an employee’s wages) is not a medical expense and therefore not deductible.

Medicare Part B. Medicare Part B is supplemental medical insurance. Premiums paid for Part B are a deductible medical expense.

Home Improvements

Deductible medical expenses include amounts paid for home improvement if the main purpose of the improvement is for medical care for the individual, the individual’s spouse or his dependents.

Long-Term Care Insurance

Premiums paid on a qualified long-term care insurance contract are deductible as a medical expense, subject to certain limits based on age.

A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. The contract must (under Internal Revenue Code (IRC) Sec. 7702B(b)):

1) Be guaranteed renewable;

2) Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;

3) Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits; and

4) Generally, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare (except where Medicare is a secondary payer) or the contract makes per diem or other periodic payments without regard to expenses.

The amount of qualified long-term care premiums that can be deducted is limited to the amounts found in the table Long-Term Care Premium Deduction Limits (2019) (shown below). Limits are premiums paid per person, (IRC Sec.213 (d)(10), as adjusted).

Long-Term Care Premium Deduction Limits (2019)

Age 40 or Under$420
41 to 50$790
51 to 60$1,580
61 to 70$4,220
71+$5,270

Nursing Home and Other Long-Term Care Facilities

Under IRC Sec. 213(d)(1), medical care includes long-term care (see preceding discussion). Thus, the deductibility of amounts paid to institutions such as nursing homes, assisted living facilities, etc, depends on the particular needs and impairments of the individual and the services provided by the institution.

Amounts paid to a nursing home qualify as a medical expense if they meet either the medical care requirement of Reg. 1.213-(1)(v) or the definition of qualified long-term care services. Generally, qualifying a long-term care services will be easier than qualifying as medical care.

Credit for the Elderly

A tax credit is available to individuals who are age 65 or over before the end of the tax year (IRC Sec. 22(a)). The same credit is also available to taxpayers under age 65 who are permanently and totally disabled and who retired on disability.

· The credit equals 15% of a statutorily determined base amount, less nontaxable amounts received as a pension, annuity, or disability benefit (including, but not limited to, nontaxable social security and Veterans Administration payments), and less a portion of the taxpayer’s AGI.

· For married taxpayers filing jointly, the base amount is reduced by nontaxable payments received by either spouse.

· The credit is computed on Schedule R (Credit for the Elderly or the Disabled) and attached to Form 1040.

· For married taxpayers filing a joint return, the maximum AGI for qualifying for the credit is $25,000 when both spouses qualify. For single taxpayers, the maximum AGI for qualifying for the credit is $17,500.

Form 1040-SR

As part of the Bipartisan Budget Act passed on Feb. 9, 2019, Congress ordered the IRS to come up with a new Form 1040, called the 1040-SR for seniors. The intent was to give individuals age 65 or older an easier form than the Form 1040 but without the income restrictions of forms 1040-A and 1040-EZ. Those individuals who are age 65 or older (married couples – both spouses must be over 65), can use Form 1040-SR no matter the amount or source of their income including: (1) Social Security;  (2) qualified retirement plans, annuities, and deferred compensation plans; (3) interest; (4) dividends; (5) capital gains and losses and (6) wages.

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars,  located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652.  Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.