What Seniors Must Know Before Filing Their 2011 Tax Return (Part 4)

For seniors, the Internal Revenue Service is divided into 2 parts:

(1) The Good IRS and

(2) The Bad IRS

The Bad IRS - that's the one we are all familiar with - its job is to try to take as much money from you as it can.

The Good IRS - we don't hear too much about them - its job is to save you as much money as it can.

This is the fourth in a series of articles about the Good IRS and information and resources it makes available to help seniors through the onerous task of filing their tax returns. In Part 3, we discovered how the IRS addresses the Eternal Question, "Do I need to file a tax return?" Part 4 explores IRS resources to help you determine what income is taxable for seniors and what is not taxable.

Here again the Good IRS comes to the rescue with Publication 554 "Tax Guide for Seniors" http://www.irs.gov/publications/p554/ch01.html. Chapter 2 "Taxable and Nontaxable Income" is specifically geared toward seniors with an explanation of the taxability of income from sources such as Individual Retirement Accounts, pensions, social security, volunteer services, life insurance proceeds, home sales and reverse mortgages.

The IRS starts off the Chapter 2 by telling taxpayers that, in general, "income is taxable" (what else would you expect them to say?). Thankfully, however, the Good IRS goes on to provide a fairly comprehensive discussion of the exemptions that are specifically allowable to seniors. Highlights include:

Retirement Plan Distributions. This section discusses the amounts you received from traditional IRAs (not a Roth or SIMPLE IRA), employee pensions or annuities and disability pensions or annuities. Particularly helpful is the explanation of how to compute the tax-free part of your pension or annuity.

Social Security Benefits. This includes monthly retirement, survivor, and disability benefits and does not include supplemental security income payments, which are not taxable. This section explains how to figure out if any of your benefits are taxable and, if so, where to report it on the Federal tax forms.

Sickness and Injury Benefits. This includes disability pensions, workers' compensation and other sickness and injury benefits. Generally, you must report as income funds received for injury or sickness through your accident or health plans that is paid for by your employer. However, as Chapter 2 explains, certain other payments may or may not be taxable.

Life Insurance Proceeds. Generally, life insurance proceeds paid to you is not taxable. However, how you receive the payment and some other circumstances may cause at least some of the proceeds to be taxable. See Chapter 2 for details.

Reverse Mortgages. In cooperation with Robert Wagner, Chapter 2 explains that a reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. In general, although the amount you receive is not taxable, there are some related tax consequences. If you are thinking about getting a reverse mortgage, you must read what Chapter 2 has to say about the tax treatment.

Part 5 of "What Seniors Must Know Before Filing Their 2011 Tax Return" will discuss deductions that are of particular interest to seniors. I will also cover other senior tax, housing, finance or other issues of general interest to seniors by request and can be reached at natsbaseball2@yahoo.com.