Paying taxes is never enjoyable, but it’s fairly straightforward for wage earners. But as taxpayers age and retire, they find themselves dealing with a whole new set of tax rules.
Increased gross income threshold and standard deductions
Taxpayers age 65 or older have a higher gross income threshold for tax filing. If your 65th birthday is on or before January 1 of the following year, you will need to file a return if your gross income is
- Single - $14,050
- Head of household - $20,300
- Married filing jointly (one spouse only) or Qualifying widow(er) - $26,100
- Married filing jointly (both spouses) - $27,400
- Married filing separately - $5
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington), a married person’s or registered domestic partner’s gross income includes one-half of community income.
Taxpayers may take additional standard deductions if they are over age 65 or legally blind. This is not available to married taxpayers filing separately.
Surviving spouses and personal representatives
A surviving spouse who has not remarried before the end of the year can file a joint return with that spouse in the year of the deceased spouse’s death. However, a surviving spouse who remarries before the end of the year cannot file a joint return with the deceased spouse. In that instance, a separate return must be filed for the deceased spouse.
If a surviving spouse does not file jointly with a deceased spouse for the year of death, a personal representative must file a final return for the deceased spouse. This can be the executor named by the deceased in a last will and testament, an administrator or anyone in charge of the deceased’s property.
Income of seniors and retirees
Elderly taxpayers must pay taxes on earned compensation as well as self-employed business income, investment income, state and local tax refunds, rentals, royalties, farm income, unemployment income, passthrough income (partnerships, S corporations, estates and trusts) and miscellaneous income. There are some other types of income that they must report:
Individual retirement arrangements (IRAs). There are several types of IRAs: traditional IRAs, Roth IRAs, and SIMPLE IRAs. Distributions from these accounts are generally taxable in the year received. Exceptions are rollovers, tax-free withdrawals and returns of nondeductible contributions. If a distribution is made to a taxpayer under age 59½, the taxpayer will incur a 10% tax, reported on Form 5329.
For distributions made between December 31, 2019 and December 31, 2020 to a taxpayer who is or whose spouse or dependents suffered from COVID-19 or who have lost their jobs or suffered financial hardship as a result of COVID-19, the distributions may be reported ratably over three years and are not subject to 10% tax for early withdrawals before age 59½.
For 2020, required minimum distributions (RMDs) are waived. The general rule is that RMDs must begin from IRAs and qualified contribution plans beginning at age 70½. Taxpayers who fail to take an RMD are subject to an additional tax of 50% of the difference between the RMD amount and the amount actually taken.
Pensions and annuities. If the taxpayer didn’t pay any of the cost of the pension or annuity and the employer didn’t withhold any of the cost, the payments received by the taxpayer are fully taxable. A taxpayer who paid part of the cost can exclude portions of their payments from taxable income that remain the same each year. These portions are calculated when the annuity payments begin.
There are two methods to determine the excludable amounts: the simplified method and the general rule. The Simplified Method Worksheet is used to compute the excludable amount allowed under the simplified method. The General Rule can be found in IRS Publication 939, General Rule for Pensions and Annuities.
The following persons cannot use the simplified method:
- Recipients of payments from nonqualified plans
- Recipients of payments from qualified plans who are age 75 or older on their annuity starting dates and are entitled to at least 5 years of guaranteed payments.
Any taxpayer who cannot use the simplified method must use the general rule. Qualified plans include IRAs, 401(k)s, 403(b)s, and 457 plans. Distributions from retirement plans are reported on Form 1099-R.
Social security and Railroad Retirement Benefits. These are reported on Form SSA-1099 (social security) and Form RRB-1099 (Railroad Retirement Benefits).
If the sum of one half of the reportable amounts on Form SSA-1099 or Form RRB-1099, other taxable income, tax-exempt interest income, and certain exclusions from income exceeds the following thresholds, some or all of the reportable amounts on Form SSA-1099 or Form RRB-1099 may be taxable:
- Married filing jointly - $32,000
- Single, head of household, qualifying widow(er), or married filing separately who lived separately from spouse throughout the taxable year - $25,000
- Married filing separately who lived with spouse at any time during taxable year - $0
Seniors and retirees are likely to have higher medical expenses than other taxpayers. They can claim them as itemized deductions if the total of these expenses exceeds 7.5% of their adjusted gross income.
Deductible expenses include (this is not an exhaustive list):
- Capital improvements to a taxpayer’s home (e.g. wheelchair ramps) and lead-based paint removal
- Doctor, dentist and hospital fees and hospital meal costs
- Diagnostic devices
- Lab fees
- Medical insurance and long-term care premiums (including Medicare Parts B and D)
- Medical transportation costs (including oil, gas, and parking fees and tolls. Does not include depreciation, insurance, general repairs or maintenance on vehicles)
- Mileage incurred for medical purposes (17¢ per mile)
- Nursing services
- Oxygen and oxygen equipment
- Prescription medications (except when ordered from a foreign country)
- Special education costs
- Special medical equipment (e.g. guide dogs, wheelchairs, crutches, hearing aids, eyeglasses, contact lenses, artificial limbs, false teeth)
- Contributions to Archer MSAs (medical savings accounts) and HSA (health savings accounts) payments
- Health club dues
- Household help
- Life insurance premiums
- Over-the-counter medications
- Prescription medications ordered from a foreign country
- Surgery for purely cosmetic reasons
Credit for the elderly or disabled
Qualified individuals may claim the Credit for the Elderly or Disabled. Qualified individuals are U.S. citizens or resident aliens who are age 65 or over at the end of the tax year or are under 65 or over; retired on permanent and total disability (must attach a doctor’s statement); received taxable disability income; and had not reached mandatory retirement age by January 1. Married taxpayers filing separately who lived together at any time during the year are not eligible for the credit.
There are applicable credit limits, depending on filing status, adjusted gross income and retirement or disability income.
Getting older changes one’s tax reporting responsibilities and adds opportunities. Tax accountants and professionals can help seniors and retirees make sure they are reporting and paying taxes correctly. If you’re getting up to retirement age, consult with a financial planner or other professional who can help make sure you’re taken care of.