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Susan Tompor: What triggers extra taxes on baby boomers?

Detroit Free Press Money section columnist Susan Tompor. (Jessica J. Trevino/Detroit Free Press/TNS)
Detroit Free Press Money section columnist Susan Tompor. (Jessica J. Trevino/Detroit Free Press/TNS) TNS

Baby boomers are well-practiced in filing income tax returns, but their tax dollars can fly out the window if they don't pay attention to some specific rules that apply to retirees and others in their 50s and 60s.

Here are five different tax tips for boomers:

-- Never assume that your Social Security retirement benefits are tax-free

All of your Social Security benefits won't be taxed, but depending on how much money you're generating in retirement, it's possible that up to 85 percent of your Social Security benefits could be included in your gross income and be subject to federal income taxes.

How much you pay in taxes will depend on the amount of benefits, other income (including tax-exempt interest from municipal bonds), and your filing status, said Barbara Weltman, author of "J.K. Lasser's 1001 Deductions and Tax Breaks 2016."

"If benefits are taxable this year, consider voluntary withholding to cover your projected tax for the future," Weltman said.

See form W-4V for a "voluntary withholding request."

Lisa Greene-Lewis, a certified public accountant and tax expert for TurboTax, said married couples need to pay particular attention to when Social Security benefits are taxable.

Often, one spouse might be collecting Social Security benefits while the other is still be working.

Here's a breakdown of when Social Security benefits can be taxed:

-- No Social Security benefits are taxed if your income is less than $25,000 for a single return or $32,000 on a joint return. The income calculation here involves adding up your adjusted gross income, plus tax-free interest and half of your Social Security benefits.

-- You'd pay tax on up to 50 percent of your benefits if your income ranges from $25,000 to $34,000 if single. If married, the income range is $32,000 and $44,000.

-- You'd pay tax on up to 85 percent of your Social Security benefits if your income hits more than $34,000 if single. Married couples with incomes more than $44,000 pay income tax on up to 85 percent of Social Security benefits.

Plan how much money you'd withdraw from a 401(k) in a given year, as well, so you might limit how much money is taxed from Social Security benefits every year while in retirement.

-- Keep an eye on the extra 3.8 percent tax on investments.

If you're looking at generating cash by selling off investment property, talk to your tax preparer first. Find out the potential impact of what's often called the 3.8 percent Medicare surtax in a given year. The tax can apply to net investment income of individuals, estates and trusts that have income above a set threshold.

What's officially called a net investment income tax went into effect in 2013. See form 8960.

Another issue to consider: Your adjusted gross income in a given year can influence other costs too. Remember, a high-income premium surcharge for Medicare Part B will kick in for singles with a modified adjusted gross income of more than $85,000 and for couples with a MAGI of more than $170,000. (The premiums for 2017 are based on the AGI reported on 2015 tax returns.)

-- Once you hit your 70s, reconsider how you donate to charity.

If you are sitting on a sizable amount of money in your regular IRAs, consider taking your required minimum distribution by having money sent from an IRA to a charity. It's called taking "qualified charitable distributions."

In general, required minimum distributions must be taken each year beginning with the year you turn age 70½.

If you make a direct transfer of money to a charity from an IRA, Weltman said, you're not seeing that distribution boost your adjusted gross income, which influences other tax breaks.

Also some seniors no longer itemize deductions, so they'd still get a tax benefit with a qualified charitable contribution.

-- Get an extra break on medical expenses if age 65 or older.

Typically, you can only get a tax break for qualified medical and dental expenses once those expenses exceed 10 percent of your adjusted gross income.

But if you or your spouse is 65 or older, the threshold for medical expenses is 7.5 percent of your adjusted gross income. That exception works in 2015 and 2016. But expires after that.

Susan Tompor, the personal finance columnist for the Detroit Free Press, can be reached at stompor @freepress.com.

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