Many of the tax rules for individual taxpayers depend on age. Attaining a birthday may entitle an individual to a special tax break or end entitlement to another. Here is a rundown of key birthdays and what they mean for federal income taxes. It should be noted that some apply on the date of the birthday, some rules apply when the birthday is achieved as of the close of the taxable year, and some apply with respect to the half-year birthday.
The dependent care credit can be claimed for a child who has not attained age 13 (Code Sec. 21(b)(1)(A)). This means that expenses up to this birthday can be taken into account for the year in which this birthday occurs.
Age, however, is disregarded if the child is a dependent who is physically or mentally incapable of self care (Code Sec. 21(b) (1)(B)).
A tax credit of up to $1,000 can be claimed for a child under the age of 17 (Code Sec. 24(c)(1)). If they turn 17 during the year, no credit is allowed for that year; the credit is not prorated for this purpose. There is no age exception for a disabled child (Polsky, CA-3, USTC ¶ 50,506).
A contribution of up to $2,000 can be made annually to a Coverdell Education Savings Account (ESA) until a child attains age 18 (Code Sec. 530(b)(1)(A)(ii)). However, a contribution can be made until the birthday. For example, if a child becomes 18 years old on May 1, 2017, a contribution of up to $2,000 can be made for 2017 until April 30, 2017. The contribution amount does not have to be prorated for the portion of the year in which the child was under age 18.
Ages 19 and 24
For purposes of treating a child as a qualifying child for the dependency exemption, these two birthdays come into play (Code Sec. 152(c)(1)(C)). A child can be a qualifying child if younger than the taxpayer claiming the exemption and is under age 19. A child can continue to be a qualifying child up to the age of 24 if he/she is a full-time student and younger than the taxpayer.
However, a parent may still claim a dependency exemption for a child who does not meet the definition of a qualifying child if the child can be treated as a qualifying relative (Code Sec. 152(d)). Thus, if a parent is supporting a child who is 32 years old in the parent’s home, a dependency exemption can be claimed as long as the child’s gross income is not more than a set amount ($4,050 in 2017) and other requirements are met.
Ages 19 and 24 are also key birthdays for the kiddie tax (Code Sec. 1(g)). Once this age is obtained, all of a child’s unearned income is taxed only at the child’s rates rather than the parent’s top tax rates.
Under the Affordable Care Act, a child can remain on his/her parent’s insurance policy until the age of 26. This is so whether the child is a dependent or even lives with the parent. However, once the child attains age 26, this coverage is no longer permissible.
When a beneficiary in a Coverdell ESA attains age 30, the account must be distributed to him or her within 30 days of this birthday (Code Sec. 530(b)(1)(E)). Even if there is no actual distribution, it is deemed to occur on this date. Earnings in the account become taxable at this time.
However, the deemed distribution rule does not apply if the beneficiary has special needs. Also a deemed distribution can be avoided by changing the beneficiary of the account to a “member of the family” (as defined in Code Sec. 529(e)(2), such as the beneficiary’s child, sibling.
Individuals with compensation from a job or selfemployment can make a “catch-up” contribution to certain qualified retirement plans and IRAs (including Roth IRAs). These additional contributions are permitted to enable workers to maximize retirement savings. Despite the term “catch up” for those age 50 and older, there is no relationship to prior contributions or the absence of such contributions.
For 2017, the additional catch-up amounts (Notice 2016-62):
• 401(k), 403(b), and 457 plans: $6,000
• SIMPLE IRAs: $3,000
• IRAs and Roth IRAs: $1,000
The 10% early distribution penalty on distributions from qualified retirement plans prior to age 59 ½ does not apply if distributions are made because of separation from service after age 55 (Code Sec. 72(t)(2)(A)(v)).
As in the case of retirement plans and IRAs, additional contributions based on age can be made to health savings accounts (HSAs) beginning at age 55. The additional contribution is $1,000. This amount is fixed by law; it is not indexed for inflation.
The 10% early distribution penalty on distributions from qualified retirement plans and IRAs does not apply after attaining age 59 ½ (Code Sec. 72(t)(2)(A)(i)).
An individual who uses the standard deduction can claim an additional amount for age (Code Sec. 63(f)). For 2017, the additional standard deduction amount is $1,550 for singles and $1,250 for joint filers (for each spouse age 65 and older).This applies to someone who attains age 65 before the close of the taxable year. It also applies to anyone with a January 1 birthday; he or she is deemed to have reached age 65 in the previous year. For example, a person who attains age 65 on January 1, 2018, can claim the additional standard deduction on a 2017 income tax return.
This age also impacts the threshold for filing an income tax return (Code Sec. 6012(a)(1)(B)). More specifically, the gross income threshold is increased by the additional standard deduction amount.
Age 65 is also the age when distributions from HSAs can be taken penalty free for nonmedical expenses. However, these distributions are still subject to income tax.
Becoming 70½ years old bars any further contributions to an IRA (Code Sec. 219(d)(1)). No contribution is allowed if this age is attained by the end of the year. This contribution limit applies even though the individual continues to work. However, contributions to a SEP and a SIMPLE-IRA, which are IRA-based retirement plans, continue past this age, even though required minimum distributions simultaneously start at this time, explained next.
Attaining age 70½ triggers the required minimum distribution (RMD) rules for qualified retirement plans and IRAs. Owners of these accounts must begin their RMDs by the end of year in which this age is reached. For example, an individual’s 70th birthday is March 1, 2017. She reaches age 70½ in 2017, so her first RMD is due by December 31, 2017. If her birthday had been July 1, she would not attain age 70½ until 2018 and her first RMD would be due by December 31, 2018.
The failure to take an RMD can trigger a 50% penalty (Code Sec. 4974(a)). However, the RMD can be delayed in some circumstances:
• The first RMD is treated as timely if taken by April 1 following the year in which the taxpayer attains age 70½. In the earlier example, she would not have a penalty if her first RMD were taken by April 1, 2018. However, in any event, the second RMD is December 31, 2018.
• An individual who is still working for a company with a qualified plan may postpone RMDs until actual retirement if the plan permits it. However, this delay does not apply to anyone who is a more-than-5% owner of the company. And it does not apply to IRAs and IRA-based plans (e.g., SEPs, SIMPLE IRAs, and SARSEPs).
There are no lifetime RMDs for the owner of a Roth IRA.
Attorneys are used to working with tickler systems and calendars to ensure that key deadlines for certain actions are timely met. The same methods should be used to ensure that age-related tax rules are observed.
Executive Editor Sidney Kess is CPA-attorney, speaker and author of hundreds of tax books. The AICPA established the Sidney Kess Award for Excellence in Continuing Education in his honor, best-known for lecturing to over 700,000 practitioners on tax. Kess is senior consultant for Citrin Cooperman, consulting editor to CCH and Of Counsel to Kostelanetz & Fink.