TAX TIPS FOR PERSONS WITH HIV/AIDS
(Revised October 1997)
The following tax information is provided by the Pacific-Northwest District office of the Internal Revenue Service through the auspices of its Seattle chapter of GLOBE (Gay, Lesbian, and Bisexual Employees).
EXEMPTIONS
INCOME
EXPENSES
CREDITS
WITHHOLDING
GIFT and ESTATE TAXES
DIRECT ASSISTANCE FROM IRS
EXEMPTIONS
Dependents
You may be able to claim your partner as your dependent if you meet all of the following tests:
- Your partner lived with you for the entire year as a member of your household.
- Absence due to illness, even if in a nursing home or hospice for an indefinite period of time, is considered temporary and does not disqualify your partner under this test. However, this test can be met only if local law does not prohibit cohabitation.
- Your partner must have been a U.S. citizen or resident alien, or a resident of Canada or Mexico, for some part of the year
- Your partner had taxable income of less than $2,650 (1997 tax return) for the year
- You provided more than half of your partner's total support during the year
- Your partner is not filing a joint return with anyone
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INCOME
SSI: Supplemental Security Income (SSI) is not taxable
Social Security Benefits
If you are receiving benefits other than SSI from Social Security, their taxability depends on your other income. For a single individual, divide the SS benefits received for the entire year by two, and make the following calculation: 1) add to that number all other taxable income plus tax-exempt interest, and 2) subtract your total adjustments (F. 1040 line 31 or F. 1040A line 15). If the total is $25,000 or less, none of the SS benefits is taxable. If the total is greater, use the worksheet in the 1040 or 1040A instructions to determine the taxable portion.
Accelerated Death Benefits and Viatical Settlements
Many life insurance policies provide for "living benefits" that are designed to assist terminally ill individuals with large medical and living expenses. Another option is to sell or assign ownership of your policy to a viatical settlement company and receive a percentage of the face amount of that policy. In either case, benefits received on or after January 1, 1997, are not taxable. The nontaxability of these benefits will need to be explained on your tax return only if you receive Form 1099-R (Distributions From Pensions...Insurance Contracts, etc.) from your insurance company that shows a taxable amount.
Sick Pay / Disability Income
If your benefits are paid through accident or health insurance (this includes long-term disability and loss of income policies) and:
- Your employer paid all premiums -- benefits are fully taxable
- You paid all premiums -- benefits are not taxable
(Note: If you paid the premiums through a cafeteria plan with your employer and the amount of the premiums was not included in your W-2, the benefits you receive will be fully taxable)
- Both you and your employer paid premiums -- only the amount you receive that is due to your employer's payments is taxable (e.g., if your employer pays 25% of the premiums, 25% of the benefits are taxable)
If you retire on disability:
- Payments you receive are taxable as wages until you reach minimum retirement age (the age at which you could first receive an annuity from your employer's retirement plan were you not disabled). You should receive Form W-2; report income on line 7 of Form 1040 or Form 1040A.
- Beginning on the day after you reach minimum retirement age, your payments will be taxed as a pension or annuity. If you made any post-tax contributions to your pension/annuity, part of your payments will be nontaxable. You should receive Form 1099-R; report this income on line 16 of Form 1040 or line 11 of Form 1040A.
Other Types of Insurance (e.g., insurance to pay off credit card balances, your mortgage, your burial expenses)
If you have insurance that is paying off any of these kinds of debts, the general rule is that you will have taxable income only to the extent that the payments exceed the premiums you paid.
Pensions / Retirement Plans / Annuities / IRAs
Retirement plans that either you or your employer have established are another source of funds. Below is information about the taxability of withdrawals from the major types of plans.
Qualified retirement plan [e.g., 401(k), Thrift Savings Plan, PERS, tax sheltered annuity -- 403(b)]
Not all plans allow you to withdraw money before you reach age 591/2, or separate from service, or retire - contact your employer or former employer
If you withdraw funds before you reach age 591/2, you may be subject to a 10% early distribution tax in addition to the regular income tax. However, this additional tax does not apply to distributions that are:
- Made because you are totally and permanently disabled (i.e., not capable of earning at least minimum wage in full- or part-time work in a competitive work situation)
- Made as part of a series of substantially equal periodic payments over your life expectancy (from actuarial tables) or the joint life expectancies of you and your beneficiary
- Made to you after you separated from service with your employer, if it was during or after the year in which you reached age 55 (Note: this exception does not apply to distributions from an IRA)
- Paid to you to the extent you have deductible medical expenses (see discussion below), whether or not you itemize deductions on your tax return (New! This also applies to IRA distributions after December 31, 1996)
You will receive Form 1099-R showing the amount you withdrew; report this income on line 16 of Form 1040 or line 11 of Form 1040A
If you were under 591/2, you generally also need to file Form 5329 (Additional Taxes...) to claim the exception to the penalty mentioned above
Nonqualified retirement plan (e.g., section 457 plan)
All distributions are taxed as wages - should be included in Box 1 of Form W-2
No additional 10% tax
Privately purchased annuity (also called tax-deferred annuity, commercial annuity)
If you withdraw the entire amount before the starting date specified in your annuity contract, the amount you receive over and above your investment will be taxable. You should receive Form 1099-R; report the income on line 16 of Form 1040 or line 11 of Form 1040A.
If you withdraw only a portion before the specified starting date, the earnings will be taxed first, then your investment will be recovered.
Example:
Annuity purchased in 1991 for $10,000
$5,000 withdrawn in 1997, when cash value of annuity is $14,000
$14,000 - $10,000 = $4,000 taxable (earnings)
$5,000 - $4,000 taxable = $1,000 tax-free return of your investment
Again, you should receive Form 1099-R; report as above.
If you purchased your annuity before 8/14/82, your pre-8/14/82 investment is recovered first -- tax-free (further information in Publication 575, Pension and Annuity Income, or by calling IRS)
Subject to 10% early distribution tax, if withdrawn before you reach age 591/2. File Form 5329 with Form 1040.
Liquidating Property
Stocks / Bonds
The difference between the selling price and your investment is included in income
- Gain is fully taxable; however, the rate of tax varies, depending on the date of sale, the length of time you held the investments, and the amount of your taxable income. The new maximum capital gains rates are effective for sales or exchanges after May 6, 1997.
- Loss can be deducted from other income, but no more than $3,000 of loss can be carried to the front of Form 1040 from Schedule D
You should receive Form 1099-B (Proceeds From Broker and Barter Exchange Transactions) from your broker
Use Form 1040 with Schedule D (Capital Gains and Losses), Publication 550 (Investment Income and Expenses), Publication 564 (Mutual Fund Distributions)
Selling Your Residence
Sales before May 7, 1997: Generally, if you sold your home for more than your investment in it, the difference is taxable income. However:
- You must postpone paying tax on that gain if, within two years of the date of sale, you buy and live in a new main home that costs at least as much as the adjusted sales price of the old home
- The gain may be fully or partially nontaxable if you are at least age 55 on the date of sale and have owned and lived in your main home for at least 3 of the last 5 years. There is an exception to the 3-out-of-5-year use test if you become physically or mentally unable to care for yourself at any time during the 5-year period.
Sales after May 6, 1997: With the new provisions of the Taxpayer Relief Act of 1997, most sales will generate little or no taxable income and no replacement residence is required.
The gain may be fully or partially nontaxable if you have owned and lived in your main home for at least two of the 5 years prior to the sale. The maximum exclusion is $250,000 of gain per taxpayer, allowed each time you sell your main home, but generally no more often than once every two years.
If you have used your home for business purposes, the exclusion will not apply to the extent that any depreciation was (or should have been) deducted. This applies to business use after May 7, 1997.
Some transitional rules apply to sales made after May 6, 1997, but before August 6, 1997.
If you sell for less than your investment, you must still report the sale, but the loss is not deductible
You should receive Form 1099-S (Proceeds From Real Estate Transactions), from the person responsible for closing the transaction; however, there are now some exceptions to the requirement for this form. These exceptions do not change the need to report the sale on your tax return.
Use Form 1040 with Form 2119 (Sale of Your Home), if there is taxable gain, also complete Schedule D and attach to your Form 1040. For more information, see Publication 523 (Selling Your Home)
Selling Your Rental Property
The difference between the sales price and your adjusted basis in the property is your gain or loss on the sale
- A gain may be taxed totally as a capital gain or as a combination of capital and ordinary income, depending on the method of depreciation used. New maximum rates are in effect for capital gain and gain due to depreciation on sales after May 6, 1997.
- A loss is fully deductible
You should receive Form 1099-S (Proceeds From Real Estate Transactions), from the person closing the transaction
Use Form 1040.with form 4797 (Sales of Business Property), Schedule D (Capital Gains and Losses) and Publication 527 (Residential Rental Property)
Closing Your Business
Depending on what you do with your business--sell all or part of it, retire the assets, donate the assets, etc.--there may be some complex paperwork to file with your final tax return for the business. Unless you have a very simple sole proprietorship, it will probably be best to seek the services of a competent tax practitioner.
Contact your state to see if it requires any final notification
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EXPENSES
Medical and Dental Expenses
Generally, medical expenses must be fairly substantial to be deductible. This is because only the amount that exceeds 7.5% of your adjusted gross income can be deducted from income. Further, you must itemize your deductions to claim these expenses. Your adjusted gross income is the amount of line 32 of Form 1040; deductions are itemized on Schedule A.
Qualified expenses are those for which you were not or will not be reimbursed by insurance
Qualified expenses must be paid primarily to treat illness or to alleviate a medical condition. For example:
-Hospital fees for services, meals, and lodging
-Medical and hospital insurance premiums
-Fees for doctors, dentists, and other medical practitioners such as in-home caregivers
-Cost of transportation to and from visits to these care providers
Not every medical expense is deductible; for a more in-depth discussion of the expenses that qualify, see Publication 502 (Medical and Dental Expenses).
Funeral Expenses
No deduction for funeral, burial or cremation expenses is allowed on Form 1040.
Funeral expenses paid by your estate are deductible in computing the federal estate tax on Form 706 (United States Estate Tax Return -- see below)
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CREDITS
Earned Income Credit
This tax credit may be available to you for 1997 if you were between the ages of 25 and 64, without a qualifying child, and both your earned income and adjusted gross income for the year were less than $9,750.
You may also be eligible for the credit if you had a qualifying child living with you and both your earned income and adjusted gross income did not exceed $25,750 ($29,290 if more than one qualifying child).
See Publication 596 (Earned Income Credit) for further information
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WITHHOLDING
Sick Pay / Disability Benefits
If you receive benefits from a health insurance plan established by your employer, you will probably find that an amount is being withheld for taxes (Social Security - 6.2%, Medicare - 1.45%, and income tax).
There are some payments, however, which are not subject to Social Security or Medicare:
- Payments to you if you are entitled to Social Security disability benefits, but only on payments made in the calendar year after you become entitled to those benefits
- Payments made after you are absent from work for six calendar months
- Payments to you that are not taxable (i.e., the amount you receive that is due to premiums you paid)
If your benefits are subject to Social Security/Medicare, once you exceed the wage limit (wages + sick pay = $65,400 for 1997), sick pay will no longer be subject to Social Security. However, Medicare has no wage limit so that withholding will continue.
The requirements for income tax withholding differ depending on whether the benefits are paid by your employer, by your employer's agent, or by a third party, such as an insurance company.
If paid by employer: withholding is mandatory. The amount is generally determined by W-4 you submit to your employer
If paid by employer's agent: withholding is mandatory. The amount is treated as supplemental wages - the agent may withhold per W-4 or at a flat 28% rate
If paid by third party: withholding is optional. You may submit Form W-4S to the third party in order to request withholding
As with withholding for Social Security/Medicare, there will not be any withholding on benefits attributable to your own contributions.
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GIFT and ESTATE TAXES
The unified credit (a credit against the tax on gifts and estates currently totaling up to $600,000 in value) is used to offset taxes on gifts made during your lifetime, with the remainder being available as a credit against the value of your estate. The following contains only basic guidelines.
Gift Tax
The federal gift tax is imposed on the person making the gift (the donor), not on the recipient
There is no gift tax on the first $10,000 (cash or value of property) that you give to any person in any year. You may give this amount to any number of people each year.
The unified credit will be applied against all gifts above that amount, to a total value of $600,000. This exclusion will gradually increase - from $625,000 for gifts made in 1998, to $1,000,000 in 2006.
Use Form 709 or 709-A (United States Gift Tax Return) and Publication 448 (Federal Estate and Gift Taxes)
Estate Tax
The federal estate tax applies to the transfer of property at death
An estate tax return is required if the value of the total estate at the date of death is more than $600,000, reduced by the total amount of taxable gifts made. As discussed above, the $600,000 exclusion will increase beginning in 1998.
Use Form 706 (United States Estate Tax Return), Publication 448 (Federal Estate and Gift Taxes), and Publication 559 (Survivors, Executors, and Administrators)
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DIRECT ASSISTANCE FROM IRS
Tax Preparation Assistance
Volunteer Income Tax Assistance (1997 returns only) - call (800) 829-1040 after February 1, 1998, for nearest site
To order forms: (800) 829-3676
For questions about your individual tax return: (800) 829-1040
GLOBE chapters in the following cities may be able to offer additional assistance (including in-home tax preparation): Portland, OR; St. Paul, MN; Seattle, WA; and Washington, DC. In Seattle, call AIDS Preparation Tax Service: Jim Raftery, 329-6270
Collection Arrangements
The fact that you cannot pay your bill should not keep you from filing. In fact, if you have a balance due, filing late will increase the penalties. There are a variety of arrangements that can be made, tailored to your situation. If you would like to discuss the possibilities, give us a call at (800) 829-1040.
If you find yourself under significant hardship because of mistakes or unintentional actions by the Internal Revenue Service, or because of enforced collection action, you may benefit from completing an Application for Taxpayer Assistance Order to Relieve Hardship (ATAO) -- Form 911. Call us at (800) 829-1040 for details.