Residency Determines State Taxes
Q. I am a resident of California but maintain savings and brokerage accounts in the state of Washington, which has no state income tax. Do I have to pay California state taxes on the interest generated in the bank account and the dividends and capital gains I have earned in the brokerage account? -- D.M .
*
A. Generally speaking, you are covered by the law of the state in which you are a legal resident. The locations of your brokerage or savings accounts are irrelevant.
An exception involves real estate transactions, which can be subject to taxation by the state where the property is.
For example, you could be subject to state taxes on income from real estate sales, leases or rentals levied by the state where your property is. California will levy taxes on this real estate income but will also give you a credit for any taxes paid to another state on the same income.
Names on Accounts and Reportable Gifts
Q. I am an elderly man and wish to put my son’s name on my bank account for ease of administration. The account has more than $10,000 in it. Does that constitute a gift? What if I purchase a certificate of deposit for more than $20,000 and put my son’s name on it along with mine? Does that constitute a reportable gift? --B.T.
*
A. Neither act is considered a reportable gift. It would only be such if your son withdrew any funds above the annual $10,000 limit.
New Interest Rules Cover Only EE Bonds
Q. Do the new rules governing interest accumulation on U.S. Savings Bonds affect the HH series bonds? I am thinking of exchanging some EE bonds for HH bonds. *
J.L.B .
*
A. No, the new rules, which went into effect May 1, cover only Series EE bonds sold after that date. They eliminated the guaranteed 4% minimum rate during the first five years of a bond’s life. Instead the rate paid during the bond’s first five years is set at 85% of the rate paid on six-month Treasury notes. This rate is now 5.25%; it will be reset in November and every six months after that.
Series HH bonds currently pay a 4% interest rate. You might want to reconsider your exchange plans.
When Social Security Payments Are Taxable
Q. I am confused about when Social Security benefits become taxable and when taxpayers face loss of benefits should they earn too much. What is the difference between these two rules? --P.K .
*
A. There is a substantial difference between the two sets of regulations, although unhappy retirees often see them as a singular effort by Uncle Sam to deny them their due.
The earned-income limits essentially penalize Social Security recipients who elect to continue working. Recipients under age 65 lose $1 of benefits for every $2 of earned income over $8,160.
Retirees between 65 and 70 lose $1 of their benefits for every $3 they earn over $11,280. The only good news here is that recipients over age 70 may earn as much as they wish without any direct loss of benefits. These limits are imposed and administered by the Social Security Administration and have generally risen each year to account for inflation.
Uncle Sam has his hand out for other folks, too. Individual Social Security recipients with incomes (a broad category that also includes wages, interest, tax-exempt interest, dividends, business gains and losses, IRA distributions) of more than $25,000 annually and couples with yearly incomes of more than $32,000 must pay taxes on 50% of their benefits.
For individual recipients with incomes of more than $34,000 and joint filers with incomes of more than $44,000, 85% of the Social Security benefits are subject to IRS taxation.
The tax on 50% of benefits has been in effect for years, presumably on the theory that half of the benefits received were generated by the contributions made by employers. As such, they were loosely granted the status of taxable income. The 85% category was approved by Congress in 1993.
For more information, see IRS Publication 915, “Social Security Benefits and Equivalent Railroad Retirement Benefits.” To order, call the IRS toll-free at (800) 829-3676.
Who Remits the Social Security Taxes
*
Q. I was confused by a recent item in this column referring to an employer’s responsibility for paying the Social Security taxes for a domestic worker. Must I pay the taxes? Or does the worker pay them? --P.S.
*
A. The IRS requires that the employer make the actual remittance to the government. Whether this money is half yours and half your employee’s is a matter of negotiation between you.
You may choose to pay both shares, but your employee should then consider your half of the payment as reportable income. Or you may actually deduct the 7.65% of regular wages from each paycheck. Either way, the government expects to get its payment from the employer, not the employee.
