Confusion Over Medicare Surtax Repeal
QUESTION: Now that the Medicare catastrophic care surtax has been repealed, can you tell me what I am supposed to do about surtax payments that I was supposed to have made along with my estimated income tax payments throughout the year? I had deferred making my surtax payments during the year until the final estimated payment. But now, do I just ignore the whole thing, or do I make the payment with the final estimate and get a refund? Do I have to file any report? Neither the Social Security Administration nor the Internal Revenue Service are much help on this.--L.G.
ANSWER: Fortunately for you, the correct answer is also the easiest: Do nothing. You delayed action long enough to see the quick demise of the 15% surtax on income taxes that the federal government had originally begun imposing this year on Medicare recipients for catastrophic care. However, the tax was repealed before the first tax year was completed, and, technically, no surtaxes are owed.
Also, our tax experts say that those who did make estimated income tax payments that included a provision for the 15% surtax should reduce their final estimated payments to reflect the surtax payments throughout the year. Otherwise, you might be in line for a refund.
Procedure Clarified For Moving 401(k) to IRA
One additional note to last week’s discussion of how to handle a 401(k) account when switching employers. If you recall, a reader wanted to know whether he should roll his 401(k) funds into an individual retirement account or into the pension plan offered by his new employer.
We advised him that one of the special tax benefits available to pension plan withdrawals--five- or 10-year income averaging--would be available if he put his 401(k) funds into a separate IRA account, segregated from all other retirements savings. This is true, but only if he later rolls those IRA funds--untouched--into a qualified pension plan of some sort. This qualified plan could be offered by a future employer or it could be a Keogh plan he later establishes should he go into business for himself.
The point is that, if our reader wants to take advantage of the special income averaging, the IRA must only be used as a temporary parking place for the funds. You cannot take advantage of the income averaging, which can save you thousands when you begin receiving distributions near retirement, when you withdraw straight from an IRA. This advantage is available only for withdrawals from a qualified pension plan.
New Retiree Will Still Pay Social Security Tax
Q: I am 65 years old and will be retiring as of Dec. 31 of this year. I expect to receive a significant payment in 1990 for work I performed in 1989. I realize that I will have to pay income taxes on this payment when I file my return for 1990. But what about Social Security taxes? Will I have to make a contribution to the Social Security fund based on these earnings in 1990 even though I am technically unemployed? I have already paid the maximum Social Security tax for 1989.--M.L.
A: Yes, in addition to income taxes, you will be assessed Social Security taxes on the income you receive in 1990, even though that payment is for work performed in 1989. The way the system works, you are taxed based on when the payment is received, not when the work is performed. So even though you paid the maximum tax in 1989 and will be technically unemployed--and may even be receiving Social Security benefits in 1990--you will owe Social Security taxes on the final employment payment you receive in 1990.
However, in case it matters, you should know that whatever income you receive in 1990 based on your 1989 work will not in any way reduce the amount of Social Security benefits you are allowed to receive during 1990.
