Q: How does Social Security define full retirement age (FRA) and how much are the benefits reduced if I apply before my FRA?

A: The FRA is 66 for workers born between 1943 and 1954. The FRA increases by two months per year after 1954 till the maximum age of 67. If you were born in 1957, then your FRA is 66 and 6 months. Anyone born after 1959 has an FRA of 67. A worker receiving benefits at 62 will get a 25% or 30% benefit reduction depending on the FRA of 66 or 67.

Q: Can I receive a tax refund if I am currently making payments under an installment agreement or payment plan for a prior year’s federal taxes?

A: No, as a condition of your installment agreement, any refund due to you in a future year will be applied against the amount that you owe. Regardless of whether you are participating in an installment agreement or payment plan with the IRS, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan or child support.

Q: What is the difference of taking Social Security benefits at age 62, at your FRA or at age 70?

A: I will assume that you were born after 1959 and your FRA is 67. If you were to receive $2,000 per month at FRA and you started your benefits early at age 62, then your reduced benefits would be 30% lower at $1,400 per month. If you waited till age 70, your monthly benefits would increase by 24% to $2,480. Additionally, any year that benefits increase due to an inflation adjustment, your benefits will be adjusted.

Q: An insurance agent is trying to sell me an annuity, but I am not comfortable with this investment. What is an annuity?

A: If you are uncomfortable with any investment, never invest. An annuity is a contract between you and an insurance company. A fixed annuity pays a fixed rate of interest for a specific period of time and a variable annuity allows you to select investments with your return based on the investment performance. Annuities are not CD substitutes and are not life insurance policies. Annuities are expensive due to the layers of fees (management, administrative and mortality). Additionally, if you cancel the annuity early, you will pay a surrender charge. A glaring disadvantage of variable annuities is the gains are taxed at ordinary rates and do not receive any favorable tax treatment.

Q: What is the five-year rule for Roth IRAs?

A: You cannot take out the earnings of a Roth IRA on a tax-free basis unless the Roth is five years old and you are older than 59 1/2. The IRS defines the five-year rule based on tax years running from Jan. 1 to Dec. 31. If you funded a Roth IRA for the 2023 tax year on April 1, 2024, then the beginning date was Jan. 1, 2023. You could take out the earnings without penalties and taxes on or after Jan. 1, 2028.

Q: Can self-employed individuals receive a tax deduction for health insurance?

A: Yes, self-employed individuals can claim this deduction on Form 1040 to reduce their income tax liability. Premiums paid for health insurance covering the taxpayer, spouse and dependents qualify for this deduction. An adult child, under age 27 at the end of the year, qualifies even if the child is not the taxpayer’s dependent.

Q: I worked for a company, but did not receive a W-2 Form. What should I do to complete my 1040 tax return?

A: You need to fill out Form 4852, a substitute W-2 Form. Use your last paycheck to enter the information on Form 4852.

Q: My brother was divorced this year and has three children. Who claims the children on the income tax form?

A: The custodial parent claims the children as dependents. The noncustodial parent could claim them as dependents if the custodial parent makes a written declaration to not claim the children. Sometimes, the final divorce decree will specify who claims the children. If each parent claims the same children, the IRS will send a letter requesting clarification of the custodial parent. To avoid complications, always check with your ex-spouse.

Richard Rysiewski, a certified financial planner, welcomes all questions on tax and financial matters. Send them to Richard Rysiewski, Financial Doctor, 3001 Hartford Lane, Shelby Twp., MI 48316.