Preparing tax return for mom

Well, this is the first of what I hope to be many posts on taking care of elderly parents. So here goes...

I'm doing tax for mom and I thought it would be simple and easy. She has a small SS pension, interest income from the proceed of selling her home, a small IRA distribution, etc...

First, I neglected to have tax withholding on her interest income. I didn't think it would be so much! So it looks like she will own the IRS about $1000. No problem, she didn't own any taxes last year so there won't be a penalty.

Next, I see this 1099-R form that says mom earned $11000 from an annuity she had setup eon ago. She has just cashed it out to put into her bank to get better interest rate. This pushed her income over the $25000 limit so her SS income will be taxed! Now she own $4000 total tax! She is effectively paying 27% tax rate on that annuity income.

So the lesson here is: Watch out when your parents cash out any sort of saving. With our curious tax law, even a small amount may set off a chain reaction of tax rules that will just eat up their hard earned saving.