IRA--Deceased Spouse

If one member of a married couple dies and leaves an IRA to the other, there is a potential pitfall to avoid if the surviving spouse is under 59 1/2 years old. If the surviving spouse takes distributions from the IRA, there are no penalties for early distribution, because death is an exception. However, if the surviving spouse rolls it over into his or her own IRA or into a new IRA, then the death exception no longer applies, and penalties will be assessed on distributions. The only thing the surviving spouse can do in that situation to avoid penalties is to wait until he or she becomes 59 1/2, or until a situation arises in which some other exception applies.

Some of the other exceptions are:
Disability
Medical (subject to severe limits)
Distributions to unemployed individuals for health insurance premiums
Higher education expenses
First home buyer (up to $10,000)
Distributions to reservists while on active duty for at least 180 days.

Qualified Charitable Distribution

Many people are familiar with or have used the Qualified Charitable Distribution (QCD). It enables a person over 70 1/2 years old to make a direct payment to a charity from his or her IRA with no tax consequences. Without the QCD feature, if you take money out of an IRA and donate it to a charity, you have to pay tax on the withdrawal, but you are not guaranteed to get a deduction for the full amount of the donation. This is especially true for someone who does not usually itemize deductions. Various other factors can enter in to raise your tax despite the fact that all the money went directly to a charity. With the QCD, if the money is paid directly out to the charity by the IRA and never touches the taxpayer's hands, there is no effect on income tax.

The QCD has been in effect for a few years, but it is scheduled to expire at the end of this year. It was supposed to expire last year, but Congress renewed it at the last minute, and gave people till the end of January, 2011, to do a QCD for 2010. No one knows (probably not even Congress at the moment) if it will be renewed again.

IRS Budget Cuts

Kiplinger reports that the IRS's budget will be cut back for 2012. The only question is by how much. So far, Congress has deep cuts in mind, but that could change by the time the budget is finalized. It could mean even longer waits on hold when we try to call them. It could possibly mean that the IRS has less resources for collections. The last we heard about that, the plan had been to put more resources into collection, but apparently budget realities could interfere with that. From the government's point of view, putting more resources into collections would be cost-effective, as it would bring in more money than than was spent on it. But don't tell them that. (Sssshhhh!)

Social Security

Social Security recipients will get a 3.6% raise in 2012. They went a couple of years without a raise, because there supposedly was no inflation during those years.

A frequent question is, what happens if I retire before the full retirement age? People can retire at age 62 if they want, but their monthly checks will be less, and they will have limits on the amount of income they can earn before their benefits are reduced. After full retirement age (which is 66 for people retiring in 2012), you can earn as much as you want without any limitations on your SS benefits.

The earnings limits for people under 66 apply only to "earned" income, not things like rents received, interest, dividends, etc.

In 2012, the amount a person under 66 can earn without benefit cuts will be $14,640.