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Living off savings
Old 09-10-2012, 09:35 AM   #1
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Living off savings

My husband is 57 and has been out of work for 2 years. We have been living on savings and I watch our grandchildren while my daughter works. She helps us out in many ways. To be able not to dip into our savings our daughter has been helping out with our house payment which is less that she would pay another babysitter and she is happy it is us and not a stranger caring for her children. This averages about $400 a month.

We haven't filed a tax return because we were under the impression that anything under $5000 a year we didn't have too. Is this correct?

He has a IRA in the bank but cannot touch this till he is $59 1/2 we were told. But the interest rates really stink on this money.

We do suppose that we may have to take money out of his IRA before he reaches 59 1/2 but we are really trying not too.

I have no medical insurance and my husband can go to the VA hospital if he has too but not me.
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Old 09-10-2012, 10:11 AM   #2
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We haven't filed a tax return because we were under the impression that anything under $5000 a year we didn't have too. Is this correct?

you do have to file....self employed earnings over 400 dollars are subject to ss.
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Old 09-10-2012, 10:18 AM   #3
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ducky is correct.

From the IRS website:

Do you need to file a Federal Income Tax Return?

Quote:
Were you self-employed with earnings of more than $400.00?
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Old 09-10-2012, 10:45 AM   #4
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If you pull money out of the IRA before 59 1/2, in most cases you will have to file fed, state and possibly local tax returns, too. 10% penalty is due plus taxes on this income (if due). This is something you really want to avoid.
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Old 09-10-2012, 10:50 AM   #5
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You should be able to move your IRA from the bank to Vanguard, for example, and then invest it in a target retirement fund or Wellesley or something, without the IRS penalty. Even if it's in CDs at the bank, this might be to your benefit--you could talk to your bank about it.

Re income taxes, I thought there might be an exception for family members caring for relatives, but apparently not. Continuing the information above in Alan's link, there is also this:

Quote:
Childcare providers. If you provide child care, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it.
Babysitting. If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.
What is Taxable and Nontaxable Income?

But if you file these taxes, I would think you could then deduct the mortgage interest and property taxes, which might effectively wipe out any income tax.
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Old 09-10-2012, 10:55 AM   #6
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Originally Posted by Free To Canoe View Post
If you pull money out of the IRA before 59 1/2, in most cases you will have to file fed, state and possibly local tax returns, too. 10% penalty is due plus taxes on this income (if due). This is something you really want to avoid.
Not if you do a 72(t) exception.
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Old 09-10-2012, 11:14 AM   #7
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Originally Posted by Doxielvr3 View Post
We haven't filed a tax return because we were under the impression that anything under $5000 a year we didn't have too. Is this correct?
As noted previously, you do have to file. And there are several programs written into the tax code that assist low income folks. Depending on your situation you could end up getting more money from the government than you paid in taxes.
Also as noted, there are ways you can take money from your IRA starting right now and not pay a penalty. In addition to the 72t method noted earlier, if the account is a Roth IRA, you can withdraw any contributions you made (but not the interest earned) without paying a penalty.
Yes, the banks aren't paying very much in interest right now. If you'd like, folks here may have some ideas on how you can earn a little more. Even if you decide to leave the money in a bank account, different banks pay different interest rates and maybe you guys could earn a few dollars more each month--every bit helps.

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Old 09-10-2012, 11:14 AM   #8
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So even though she doesn't actually give us the money but pays our house payment monthly to help us out that is considered income?
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Old 09-10-2012, 11:18 AM   #9
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You would probably need to file if you consider this income. No income tax would be owed because of the low amount, but you would need to pay Social Security and Medicare taxes. You might be eligible for the earned income credit, would would probably offset much of the FICA taxes. Your daughter might be able to deduct the payment to you as child care expense. This option is worth looking into because it might not cost anything but could increase your Social Security by a couple of dollars later.

Your daughter could also consider this a gift and file the IRS form 709. No one pays anything in taxes and it is all legit and above board.
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Old 09-10-2012, 11:22 AM   #10
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This probably a gray area. Since they are family and you are not actually/formally employed by them , this might be considered a gift. Or you could make arrangements for this to be gift and you can take care of the grandkids just because you want to.

Rules for gift taxes are here

Tax Rules for Gifts « Fairmark.com
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Old 09-10-2012, 11:23 AM   #11
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She has only been paying our house payment since January. Not last year so this is what I was trying to figure out for the future.

She wanted to help us out because if I went to work I couldn't stay home to watch her babies. So yes to me this is a gift for us both
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Old 09-10-2012, 11:29 AM   #12
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Perhaps the Board experts could help vet this alternate strategy, because I'm not sure how well it can be defended to the IRS.
Helping out your daughter by watching the grandkids is not a job if it is not paid. You would do this for nothing, right? Also, gifts from your daughter, given because she is your daughter wanting to help out and not as compensation for childcare or anything else are nontaxable gifts, up to the gift tax limit. ($13000 per year to any one person). It seems to me that the key is that the gifts have nothing to do with the childcare. In other words the daughter would give the money as gifts regardless of the childcare, and you would provide the childcare regardless of the gifts. This is not expert advice, so Board experts, could this concept work?
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Old 09-10-2012, 11:32 AM   #13
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Perhaps the Board experts could help vet this alternate strategy, because I'm not sure how well it can be defended to the IRS.
Helping out your daughter by watching the grandkids is not a job if it is not paid. You would do this for nothing, right? Also, gifts from your daughter, given because she is your daughter wanting to help out and not as compensation for childcare or anything else are nontaxable gifts, up to the gift tax limit. ($13000 per year to any one person). It seems to me that the key is that the gifts have nothing to do with the childcare. In other words the daughter would give the money as gifts regardless of the childcare, and you would provide the childcare regardless of the gifts. This is not expert advice, so Board experts, could this concept work?
Actually you are correct. I would watch these children regardless if she were helping me out. She wants to help us and chose to do so. She also sometimes buys us groceries. She does this on her own and we did not ask this of her.
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Old 09-10-2012, 11:45 AM   #14
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Originally Posted by gromit View Post
Perhaps the Board experts could help vet this alternate strategy, because I'm not sure how well it can be defended to the IRS.
Helping out your daughter by watching the grandkids is not a job if it is not paid. You would do this for nothing, right? Also, gifts from your daughter, given because she is your daughter wanting to help out and not as compensation for childcare or anything else are nontaxable gifts, up to the gift tax limit. ($13000 per year to any one person). It seems to me that the key is that the gifts have nothing to do with the childcare. In other words the daughter would give the money as gifts regardless of the childcare, and you would provide the childcare regardless of the gifts. This is not expert advice, so Board experts, could this concept work?
+1 this makes sense to me
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Old 09-10-2012, 11:53 AM   #15
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I actually have been watching them for years for free. My daughter said, I don't want you to have to go to work so I will help out. She chose to do this on her own. I don't really feel it is payment for watching the children. I was just trying to figure out exactly what to do about this. Not to cheat anyone.
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Old 09-10-2012, 12:05 PM   #16
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Originally Posted by gromit View Post
Perhaps the Board experts could help vet this alternate strategy, because I'm not sure how well it can be defended to the IRS.
Helping out your daughter by watching the grandkids is not a job if it is not paid. You would do this for nothing, right? Also, gifts from your daughter, given because she is your daughter wanting to help out and not as compensation for childcare or anything else are nontaxable gifts, up to the gift tax limit. ($13000 per year to any one person). It seems to me that the key is that the gifts have nothing to do with the childcare. In other words the daughter would give the money as gifts regardless of the childcare, and you would provide the childcare regardless of the gifts. This is not expert advice, so Board experts, could this concept work?
Seems like the house payment is not tied to hours/days worked. And either payments or childcare could quite possibly continue without the other. So there is only a very loose connection between the two. It does seem to fit a gift situation a little better.
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Old 09-10-2012, 12:09 PM   #17
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Seems like the house payment is not tied to hours/days worked. And either payments or childcare could quite possibly continue without the other. So there is only a very loose connection between the two. It does seem to fit a gift situation a little better.
That is wonderful news. My daughter said, Mom how can I help out when she saw I was looking to have to go to work. I said, we make it ok except the house payment is the hardest one to make. She said I want to do what I can because I love you guys. But I can tell her to stop though if it is going to cause issues for her and us. I will continue to watch them though without her help
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Old 09-10-2012, 12:13 PM   #18
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Not a tax expert but I think not taking money in the past sets a good precedence for the gift scenario.
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Old 09-10-2012, 12:16 PM   #19
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You can gift money to any individual tax free up to the annual limits so I see no problem in your daughter declaring the money she gives to you every month as a gift.
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Old 09-10-2012, 12:16 PM   #20
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Originally Posted by Doxielvr3 View Post
I actually have been watching them for years for free. My daughter said, I don't want you to have to go to work so I will help out. She chose to do this on her own. I don't really feel it is payment for watching the children. I was just trying to figure out exactly what to do about this. Not to cheat anyone.
I can't help but think of the billions that would flood into the Treasury if others tried to be as honest as you!

I'd do exactly as Gromit has posted.
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