Masonry Magazine January 1970 Page.23
TAXES
By MIRIAM MCD. MILLER
RETIREMENT PLAN FOR SELF-EMPLOYED
Are you one of the many self-employed individuals who intends to provide for your retirement years through Social Security and private investments or savings? Are you the owner of a small business with a recurring problem of retaining your top employees? If so, by all means, investigate the advantages of an H.R.10 retirement plan.
The Self-Employed Individuals Tax Retirement Act of 1962 which brought the H.R. 10 retirement plans into existence, allows a self-employed person to be treated as an employee. Such an individual may therefore be included in qualified pension, annuity, and profit-sharing plans. Any self-employed individual is eligible so long as he has "earned income" from personal services. Being a partner is no obstacle. A taxpayer who operates a small business, who may employ several employees, (including his wife), should not overlook the tax benefits of this public retirement program.
This Federal government program offers two main tax dollar savings. First, up to 10% of income (not to exceed $2500) may be placed in the H.R.10 plan each year not only for the self-employed individual but also for his employees, including his employee-wife. These sums are deductible from the income of the business, or, in other words are not taxed. Then, the earnings of these sums are exempt from current income taxes.
Your tax advisor could tell you the amount of monthly retirement income you might anticipate by the size of your monthly contributions.
However, in its Publication 560, "Retirement Plans for Self-Employed Individuals" (provided by the IRS upon request and at no charge), the IRS gives an example of a pension plan that would include owner-employees. In the example given, cach partner's total earned income was $15,000. Ten percent of the $15,000 would be $1,500, the amount permitted by the Act to be paid annually into a retirement fund. That amount would first have to be reduced by the amount paid by the owner-employee for his self-employment tax here some $982.00. It is possible that such annual contributions over the usual life expectancy might mean a pension income of some $230 a month.
In addition to the financial aspects of these plans, there may be certain other reasons for establishing a retirement plan. Valuable employees may be induced to remain with the business. The better trained people might seek employment with a concern that provides a retirement system. Competition for employees with large concerns might be somewhat more equalized. The law requires that all regular, full time employees with more than three years of service with the particular self-employed owner must be included in the retirement plan.
In order to be qualified, however, a plan must be a funded plan. It could be handled by means of a trust, a custodial account, or a bond purchase plan. Many of these plans provide for a bank or an insurance company to handle the fund.
Before a plan is established it has to be approved by the IRS. But, with the aid of a tax advisor or the trust department of a bank or a local insurance company, or with information published by the Federal government, this procedure should be relatively painless.
The plan must provide that the benefit payments of the self-employed individual may not begin before he reaches the age of 59% years, unless, of course, he becomes disabled or death intervenes. And, during the time that the plan is in existence the amounts cannot be touched. While at first glance this may seem like a hard rule, it should be remembered that this is merely a safeguard to insure that the purpose of these plans is not abused.
Since one of the basic purposes of this legislation was to help eliminate the highly discriminatory tax treatment toward the self-employed it should behoove any one eligible to at least investigate the subject.
AUTOMOBILE EXPENSES
Remember that starting with January 1, 1970, the standard mileage rate for computing the cost of operating an automobile for business purposes has been increased from 10 to 12ę per mile for the first 15,000 miles and from 7 to 9e for each mile over 15,000. Parking fees and tolls may be deducted in addition to the standard mileage rates.
Also, the standard mileage rate for computing the cost of operating an automobile in rendering gratuitous services to a charitable organization or for transportation to obtain medical care has been raised from 54 per mile to 64 per mile.
MEDICAL EXPENSES
One deduction that is not fully understood by taxpayers concerns the deduction for medical expenses paid by a taxpayer for a dependent who earns over $600 a year. You will recall that in order to claim a person who is not your child, (under 19 years of age or a full time student) as your dependent, you must furnish over half of the cost of such person's support and that person must have less than $600 annual gross income. Quite often a son or daughter cannot claim an elderly parent as a dependent because their small pension will rise over the $600 mark. However, the law does permit a taxpayer to deduct the medical expenses he pays for a person who is a dependent but whose yearly income exceeds $600.
Recently, the Tax Court was presented with a confusing solution elected by one taxpayer to cope with the finances of an elderly dependent. It seems that the taxpayer's aunt was confined to a nursing home. The yearly medical expenses of the aunt's were more than twice the sum of her pension income of some $2400. The taxpayer reported the pension income received by the aunt as part of his own gross income. He then claimed the aunt as a dependent and deducted her full medical expenses on his income tax return.
The Tax Court restructured the problem in this manner. First, the gross income of the taxpayer was reduced by the amount of the aunt's pension. The taxpayer need not and should not include it as his own income. Then, the dependency exemption for the aunt was disallowed because while the taxpayer contributed to more than half of the aunt's support, her income exceeded $600 a year. Finally, the amount of the aunt's medical expenses had to first be (Continued on page 32)