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The Street

Robert Powell

Navigating taxes in your golden years

IRS Social Security Medicare George Papadopoulos Tax Return Income Tax IRA Disability

Tax season holds a distinct significance for older taxpayers, and the Internal Revenue Service recognizes this. Some seniors, for instance, might even find themselves exempt from filing a tax return.

Here’s a look at some IRS provisions that give special treatment to older taxpayers.

Filing requirements

There's a higher gross income threshold for filing for taxpayers aged 65 or older. Now, you must be 65 or older at the end of the year to get this benefit. And you are considered age 65 on the day before your 65th birthday. Therefore, you are considered age 65 at the end of the year if your 65th birthday is on or before Jan. 1 of the following year. (Read Publication 554, Tax Guide for Seniors.)

Older taxpayers should note, however, that if income tax was withheld from their pay or if they qualified for a refundable credit (such as the earned income credit, the additional child tax credit, or the American opportunity credit), they should file a return to get a refund even if they aren't otherwise required to file a return. The IRS also notes that older taxpayers shouldn't file a federal income tax return if they don't meet the filing requirements and aren't due a refund. If an older taxpayer needs assistance to determine if they need to file a federal income tax return, they should go to IRS.gov/ITA and use the Interactive Tax Assistant.

Taxable and nontaxable income

Generally, income is taxable unless it is specifically exempt (not taxed) by law, according to the IRS. An older taxpayer's taxable income may include compensation for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges of property, and business income of many kinds.

Under special provisions of the law, the IRS notes that certain items are partially or fully exempt from tax. For instance, an older taxpayer doesn't have to include in their gross income amounts they receive for supportive services or reimbursements for out-of-pocket expenses under any of the following volunteer programs: Retired Senior Volunteer Program (RSVP), Foster Grandparent Program, Senior Companion Program, and Service Corps of Retired Executives (SCORE). All unemployment compensation received must be included in income.

See Publication 525, Taxable and Nontaxable Income, for more detailed information on specific types of income.

IRAs

In general, distributions from a traditional IRA are taxable in the year a taxpayer receives them, according to the IRS. Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. (Read Publication 590-B.)

Pensions and annuities

Generally, if a taxpayer didn't pay any part of the cost of their employee pension or annuity, and their employer didn't withhold part of the cost of the contract from their pay while they worked, the amounts they receive each year are fully taxable, according to the IRS. If the taxpayer paid part of the cost of their pension or annuity plan with after-tax money, they can typically exclude part of each annuity payment from income as a recovery of their cost (investment in the contract).

10% penalty on early distributions

Most distributions a taxpayer receives from their qualified retirement plan and nonqualified annuity contracts before they reach age 59½ are subject to an additional penalty of 10%, according to the IRS. The tax applies to the taxable part of the distribution.

Social Security

Some taxpayers will have to pay federal and possibly state income taxes on their Social Security benefits. This usually happens only if they have other substantial income in addition to their benefits (such as wages, self-employment, interest, dividends, and other taxable and certain non-taxable income that must be reported on their tax return), according to the Social Security Administration. Taxpayers will pay tax on up to 85% of their Social Security benefits, based on IRS rules. If they:

File a federal tax return as an "individual" and their combined income is

- between $25,000 and $34,000, they may have to pay income tax on up to 50% of their benefits.

- more than $34,000, up to 85% of their benefits may be taxable.

File a joint return, and they and their spouse have a combined income that is

- between $32,000 and $44,000, they may have to pay income tax on up to 50% of their benefits.

- more than $44,000, up to 85% of their benefits may be taxable.

Are married and file a separate tax return, they probably will pay taxes on their benefits.

Combined income is the sum of adjusted gross income, nontaxable interest, and half of the taxpayer's Social Security benefits.

Scott Bishop, a partner with Presidio Wealth Partners, views the taxation of Social Security as a “stealth” tax. His advice: “Plan for your taxable income. If you will be just under those ‘cliffs,’ try to stay under as the next dollar over those levels can bring a lot of your Social Security subject to taxation.”

>> Plus: Income Taxes and Your Social Security Benefit

Railroad Retirement Benefits

Railroad Retirement Benefits fall into two categories: Social Security Equivalent Benefits (SSEB) and Non-Social Security Equivalent Benefits (NSSEB). Similar to Social Security benefits, this income can be taxable.

Military retirement pay

Military retirement pay based on age or length of service is taxable, according to the IRS. Disability pensions that are based on a percentage of disability from active service in the armed forces of any country are generally not taxable. For more information, see IRS Publication 525 (2022), Taxable and Nontaxable Income.

Sickness and injury benefits

Generally, a taxpayer must report as income any amount they receive for personal injury or sickness through an accident or health plan that is paid for by their employer.

Disability pensions

If a taxpayer retired on disability, they typically must include in income any disability pension they receive under a plan that is paid for by their employer.

Life insurance proceeds

Life insurance proceeds paid to a beneficiary because of the death of the insured person aren't typically taxable unless the policy was turned over to the beneficiary for a price.

Sale of home

A taxpayer may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of their main home. If you meet all the requirements for the home sale exclusion, you can exclude the gain from your income on your tax return. However, you may still be required to disclose the sale on your tax return, according to Thomas Scanlon, CPA, CFP, a principal with Borgida & Company.

A taxpayer can choose not to take the home sale exclusion, but this is rarely done. If the taxpayer chooses not to take the exclusion, they will have to pay taxes on the full amount of the gain. (Read: Tax Aspects of Home Ownership: Selling a Home.)

Reverse mortgages

Reverse mortgages are considered loan advances and not income; thus, the amount a taxpayer receives isn't taxable. What’s more, any interest (including original interest discount) accrued on a reverse mortgage isn’t deductible home mortgage interest. See Publication 936 (2022), Home Mortgage Interest Deduction, for more information.

Adjustments to income

An older taxpayer may be able to subtract amounts from their total income (Form 1040 or 1040-SR, line 9) or total effectively connected income (Form 1040-NR, line 9) to get their adjusted gross income (Form 1040, 1040-SR, or 1040-NR, line 11).

Some adjustments to income include contributions to an IRA and Health Savings Account (HSAs).

“Within the tax code, there are provisions designed to encourage increased retirement savings,” said Jean-Luc Bourdon, the founder of Lucent Wealth Planning. “These provisions allow for additional contributions to retirement accounts starting at the age of 50.” He noted that these supplementary or catch-up contributions for the 2023 tax year amount to $1,000 for an IRA and $7,500 for a 401(k) plan, he noted.

Read: IRS provides tax inflation adjustments for tax year 2023 and 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500.

And once an individual reaches the age of 55, they are eligible for $1,000 catch-up contributions to a HSA, Bourdon noted.

To be an eligible individual and qualify for an HSA, the taxpayer must meet the following requirements:

Be covered by a high-deductible health plan (HDHP) on the first day of the month
Not be covered by other health insurance (see Publication 969 for exceptions)
Not be enrolled in Medicare (the individual can be HSA-eligible for the months before being covered by Medicare)
Not be eligible to be claimed as a dependent on someone else's tax return

Read: Health Savings Account-Glossary, at HealthCare.gov and Medicare’s tricky rules on HSAs after age 65 at the Journal of Accountancy and HSAs and Medicare FAQs.

Also see more at Publication 560 (2022), Retirement Plans for Small Business.

“There is one tax law that I think fits perfectly individuals over 70½ with enough income coming in from other sources, sizable IRAs and strong charitable intent: the Qualified Charitable Distribution (QCD),” said George Papadopoulos, a certified financial planner.

The QCD helps avoid increasing taxable income by allowing individuals aged 70½ or older to make direct transfers from their IRAs to qualified charities. The amount donated through a QCD is excluded from the donor's taxable income, which can reduce the impact on certain tax credits and deductions, including Social Security and Medicare. Since the QCD is not included in the donor's income, it does not contribute to their Adjusted Gross Income, potentially lowering their tax bracket and the amount of taxes they pay.

For married couples filing jointly, each spouse can donate up to $100,000 directly from their individual IRAs to qualified charities, satisfying their respective IRA's required minimum distribution, according to Scanlon.

Papadopoulos also noted that the RMDs do not have to start until age 73 now because of the SECURE Act 2. “It avoids hitting their income and lowers their adjusted gross income which has other tax benefits such as lowering taxes on Social Security benefits,” he said.

Of note, the $100,000 amount will start going up based on inflation in 2024.

Read: IRA FAQs - Distributions (Withdrawals), Reminder to IRA owners age 70½ or over and Seniors can reduce their tax burden by donating to charity.

Deductions

Most taxpayers have a choice of taking a standard deduction or itemizing their deductions. A taxpayer benefits from the standard deduction if their standard deduction is more than the total of their allowable itemized deductions.

If a taxpayer has a choice, they typically should use the method that gives them the lower tax, according to the IRS.

Of note, adults aged 65 or older also have a higher standard deduction. If they don't itemize deductions, they are entitled to a higher standard deduction if they are age 65 or older at the end of the year, according to the IRS. As with the higher gross income threshold for filing, you are considered age 65 at the end of the year if your 65th birthday is on or before Jan. 1 of the following year.

“The tax code softens the blow of its stick by granting taxpayers aged 65 and older a more substantial standard deduction,” Bourdon said.

The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether another taxpayer can claim you as a dependent. Generally, the standard deduction amounts are adjusted each year for inflation, according to the IRS.

Now, some individuals should itemize their deductions because it will save them money. Others should itemize because they don't qualify for the standard deduction, according to the IRS.

According to the IRS, medical and dental expenses, some taxes, certain interest expenses, charitable contributions, qualifying casualty and theft losses, and certain other expenses may be itemized as deductions on Schedule A (Form 1040).

Bourdon noted too that the tax code gradually enhances the scope of tax deductions for qualified long-term care insurance. For 2023, the deduction starts with a modest $480 deduction at age 40 and under but goes up to $5,960 by age 71 and above—with various increases in between.

Read: Topic No. 502, Medical and Dental Expenses.

Credits

Older taxpayers should also be mindful of the credits for the elderly or disabled, the child and dependent care credit, and the earned income credit. A taxpayer may be able to reduce their federal income tax by claiming one or more of these credits. They may also be able to increase their refund by claiming the earned income credit.

Credit for the elderly or the disabled

A taxpayer can take the credit for the elderly or the disabled if they meet both of the following requirements:

• They are a qualified individual.

• Their income isn't more than certain limits.

Child and Dependent Care Credit

A taxpayer may be able to claim this credit if they pay someone to care for their dependent who is under age 13 or for their spouse or dependent who isn't able to care for themselves.

Earned Income Tax Credit

The earned income tax credit (EITC) is a refundable tax credit for certain people who work and have earned income in 2023 under $63,698. The EITC is available to persons with or without a qualifying child. Read Earned Income and Earned Income Tax Credit (EITC) Tables | Internal Revenue Service.

Estimated tax

Estimated tax is a method used to pay tax on income that isn't subject to withholding. This income includes self-employment income, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards.

According to the IRS, if a taxpayer had a tax liability for 2022, they may have to pay estimated tax for 2023. In most cases, the taxpayer must pay estimated tax for 2023 if both of the following apply:

1. They expect to owe at least $1,000 in tax for 2023, after subtracting your withholding and tax credits.

2. They expect their withholding and tax credits to be less than the smaller of:

- 90% of the tax to be shown on their 2023 tax return, or

- 100% of the tax shown on their 2022 tax return. The 2022 tax return must cover all 12 months.

If Adjusted Gross Income is greater than $150,000 for married filing jointly couples or greater than $75,000 for married filing single, then the estimated tax owed would be 90% of their 2023 return or 110% of the prior year, according to Scanlon.

If all of their income is subject to income tax withholding and enough tax is withheld, they probably don't need to make estimated tax payments. For more information on estimated tax, see Publication 505 (2023), Tax Withholding and Estimated Tax.

How to get tax help

If a taxpayer has questions about a tax issue, needs help preparing their tax return, or wants to download free publications, forms, or instructions, they can go to IRS.gov to find resources. Plus, there are free options for tax preparation. Go to IRS.gov to see your options for preparing and filing your return online or in your local community, if you qualify. These options include:

Free File. This program lets you prepare and file your federal individual income tax return for free using brand-name tax preparation and filing software or Free File fillable forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA, download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE, download the free IRS2Go app, or call 888-227-7669 for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource (MilitaryOneSource.mil/MilTax).

Also, the IRS offers Free Fillable Forms, which can be completed online and then filed electronically regardless of income.