Tax Considerations for Seniors
Most people who retire have been filing taxes the same way for decades. Many find themselves surprised when they discover the process changes when after retirement age. For example, did you know that individuals who are at least 65 get to partake in a significantly larger standard deduction? This is just an example of the many considerations that exist. It’s extremely important that you familiarize yourself with all the options. When you save money, you have more money to relax!
Do You Still Need To File?
Many seniors find themselves confused as to whether they have to file taxes at all. If you earn income, then yes, you must file, especially if you make over $11,500 as a single individual (the values change if married).
- One thing to note is that Social Security benefits do not typically count as income. If you earn income from investments, then you may indeed have to file, though you’ll get to take advantage of certain benefits that aren’t available until you reach a certain age.
Social Security benefits may count as income in a couple of cases. Consider for instance if you are married but choose to file your own separate tax return. In this instance, all of the benefits you receive would be considered income.
Also note that IRA distributions, pension payments, interest earnings and dividends are all taxed. They are taxed at reduced rates, mind you, but they’re still taxed. Living your retirement via invest income is just fine, but you’ll have to pay a price for it.
Beneficial Tax Considerations
Below is a very useful list of beneficial tax considerations to keep in mind.
- You can deduct up to $1,000 for any real estate taxes you pay.
- If you and/or your partner are unable to take proper care of yourselves and require third-party, you might be able to take advantage of a Dependent Care tax credit. You can receive up to $1050 for one person and up to $2100 for two. However, if the care can be qualified as being medical in some form of another, then you can claim the cost as a medical expense.
- If you are age 65 or older, you can add $1,400 to your standard deduction; possibly even $1,100 more if you are married
- Do you take care of any grandchildren? If so, you may be able to gain more tax breaks. You’ll want to speak directly with a tax consultant to get the full scoop.
- Many medical expenses are deductible for seniors. These include everything from Medicare premiums to prescription drugs, assisted living care, nursing home care, etc. The only thing to keep in mind is that only expenses that go beyond 7.5% of your adjusted gross income count. So if you made $200,000 last year and spent $20,000 on medical expenses, you may only deduct $5000.
- Many seniors earn income from interest, capital gains, and dividends. The good news is that these are all taxed at just 15%. Furthermore, you can adjust some of costs associated with receiving any professional investment or accounting advice.
- Some seniors also continue to run businesses during retirement. Entrepreneurs can deduct many expenses: business travel, business equipment, etc.
- It’s common for seniors to give back via donations. These contributions are eligible to be deducted as itemized deductions. Keep in mind that contributions under 50% of your gross income can be deducted. Everything above does not count.
- Surprising to some, home improvements can also be deducted from your taxes. Consider for instance if you have become less mobile and need to install a stair lift. So long as your physician is willing to vouch for you, you can deduct this expense from your taxes and save money.
- If you’re 70.5 years of age, you must accept a minimum distribution from any and all tax-deferred retirement plans. If you do not do this, you can wind up triggering huge tax hikes.
- There’s one last thing to consider. If one of your children starts to take care of you financially at any time during your retirement, that child might be able to get a significant tax benefit by listing you (yes, you!) as a dependent.
Believe it or not, but this represents only a small list of tax considerations. We highly recommend speaking with a trained professional for more information.
We all experience many big events throughout our lives. However, many of us fail to realize how these events and changes might affect our taxes. Seniors need to be especially wary of such changes, because changes in taxes means could mean changes in retirement funds — which itself could either be a positive or negative thing.
- Death of a Spouse- If your spouse passes, then the year they pass is the last year you can file a joint tax return. Assuming you do not remarry, you will have to begin filing with another status: widow, head of household, single, etc. You’ll need to confer with the IRS if you have any questions.
- Disability- Some older individuals retire early due to a disability. If this is the case and you are permanently disabled, then you can take advantage of certain disability tax credits. Note that disability income received from an employer faces the same sort of taxes as regular income. However, the aforementioned disability credits can help reduce your obligations, assuming your overall income (including the disability) falls beneath $17,500. There are additional credits for specific disabilities, such as visual impairment.
- Divorce- Once a divorce is finalized, you must file as an individual. The only other option is to file as head of household during pre-finalized divorce proceedings. To do this, however, you must be living separately from your estranged spouse and must be able to claim your children as dependents. Note that this option goes away once the divorce is finalized.
It’s essential to discuss long-term care. Many seniors eventually seek the assistance of residential senior care due to chronic illness or a number of other reasons. This sort of care provides you with 24/7 supervision and helps perform the activities of daily living (ADLs). The good news is that the medical expenses associated with residential care — diagnosis, prevention, counseling, etc. — are deductible, assuming that these services are absolutely required.
The key here is that you must be taking advantage of assisted living or nursing home care for medical reasons — not just custodial reasons. Note also that non-medical expenses are not covered; meaning the price paid for lodging and meals are not included.
Tax Resources and Help
Taxes only seem to get more and more complicated every single year. New taxes laws get enacted, old regulations get removed. Many taxes remain the same but it’s incredibly complex and difficult to figure out, which is why it’s always a good idea to seek assistance.
- Tax Counseling for the Elderly (TCE)– Take a moment to read about the program known as Tax Counseling for the Elderly, or TCE. It entitles seniors who are 60 or older to free tax assistance from January 1st to April 15th. You can apply or learn more on the IRS website.
- AARP Tax-Aide– This particular program has been around since 1968 and relies on volunteers to provide tax services to low-moderate income taxpayers. Special attention is paid to taxpayers who are at least 60 years of age. It’s definitely worth looking up if you have income problems and need help with taxes.
- IRS Volunteer Income Tax Assistance (VITA)– This program is operated by the IRS and offers tax assistance to anyone who makes less than $52,000 a year. To take advantage, you’ll just need to find a local chapter within your community. It’s a useful resource, especially if you are not familiar with the many credits and deductibles currently available.
- Online Tax Care Providers– Several companies like TurboTax and others provide tax services through the Internet for very fair rates. While this isn’t a bad option to consider, try to choose a face-to-face provider instead — at least for your first year of retirement. Once you figure out the ins and outs, you can switch to an online provider.
Taxes are one of those things you must contend with for the rest of your life. It’s just a simple fact. The best thing you can do is prepare in advance by learning everything there is to know about handling taxes during retirement. Familiarize with the many tax benefits, credits and deductibles available to you. Reach out to organizations, like the AARP and IRS, and speak with someone in person. And, more importantly, get all your financial papers in order. With organization, education, and support, you retire comfortably knowing knowing your finances are in order.
About the Author: Victoria K. Stickley is a copywriter, editor, and senior content manager based in the Dallas area. Her graduate education in counseling and research has helped immensely in her writing as well as the care she provides for her grandparents. She currently provides support and resources to senior care websites as she learns and experiences senior care first-hand.