Thrifty Thinking: Tax Tips for Seniors

With tax season in full effect, there are several important tax saving ways seniors and soon to be retirees can invest for their golden years. Below are some tips every senior and soon to be retiree needs to consider and strategize for, when getting ready for retirement and to live peacefully off their nest egg.

1. Seniors who do not itemize their deductions will be eligible for a higher standard deduction amount if the senior and/or spouse are 65 years old or older.  The standard deduction for a married filing jointly couple is $12,200 in 2013. Add an additional $1,200 if you are over the age 65. You can get an even higher standard deduction amount if either you or your spouse is blind.

2. Some seniors may be eligible to receive a credit for being elderly or disabled. You must use Form 1040 or Form 1040 to receive the credit (Form 1040EZ is disallowed). The Credit is based on your age, filing status and income. You may be able to take the Credit if the senior meets two (2) criteria: a) the senior or their spouse are either 65 years or older; or under age 65 years old and are permanently and totally disabled, and b) the seniors income on Form 1040 line 38 is less than $17,500, $20,000 (married filing jointly and only one spouse qualifies), $25,000 (married filing jointly and both qualify), or $12,500 (married filing separately and lived apart from your spouse for the entire year).

Keep in mind the non-taxable part, the seniors Social Security or other nontaxable pensions, annuities or disability income must be less than $5,000 (single, head of household, or qualifying widow/er with dependent child); $5,000 (married filing jointly and only one spouse qualifies); $7,500 (married filing jointly and both qualify); or $3,750 (married filing separately and lived apart from your spouse the entire year).

3. Many seniors and current retirees don’t know that they can take advantage of many IRS-sponsored volunteer tax assistance programs which offer free tax help to seniors and to low- to moderate-income people who cannot prepare their own tax returns. For example the, the VITA Program generally offers free tax help to people who make $52,000 or less and need assistance in preparing their own tax returns. IRS-certified volunteers provide free basic income tax return preparation with electronic filing to qualified individuals in local communities. They can inform taxpayers about special tax credits for which they may qualify such as Earned Income Tax Credit, Child Tax Credit, and Credit for the Elderly or the Disabled. VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations. Another tax assistance program for seniors is the TCE Program. This program offers free tax help for all with priority assistance to people who are 60 years of age and older, specializing in questions about pensions and retirement issues unique to seniors. IRS-certified volunteers who provide tax counseling are often retired individuals associated with non-profit organizations that receive grants from the IRS. It is important that all seniors bring several important financial documents to their local VITA or TCE site including:

Proof of identification – Picture ID Social Security Cards for you, your spouse and dependents or a Social Security Number verification letter issued by the Social Security Administration or Individual Taxpayer Identification Number (ITIN) assignment letter for you, your spouse and dependents Wage and earning statement(s) Form W-2, W-2G, 1099-R, 1099-Misc from all employers Interest and dividend statements from banks (Forms 1099)

4. Another area many seniors are often surprised to learn is that some of their social security benefits may be taxable. In general, if part of your Social Security benefits are taxable, how much is taxable depends on the amount of your benefits plus other income. As a general rule, the more income you have, the more likely that some portion of your Social Security benefits will be taxed.

5. Another tax break some seniors may be able to take full advantage of is if they take care of grandchildren and other dependents. In today’s world, it's not uncommon to see families living together as bigger units, with the grandparents paying the large majority share of the household expenses. If a senior is supporting the family, they may be entitled to claim some of them as dependents, even if one or more of them is not their child.

6. Finally another difficult lesson new retirees and some seniors may unknowingly face comes in the form of taxes and penalties associated with withdrawing retirement savings. Having a tax savvy withdrawal strategy is critical for all retirees and seniors on all levels. An example of this is when people don’t know about the penalties enforced on early IRA withdrawals. If you are under the age of 59 ½ and withdrawal funds from your own account you will be subject to a 10% penalty. Another common withdrawal mistake is taking a large individual retirement account distribution to pay off debt, such as a mortgage or home equity loan. If someone withdraws $50,000 or $75,000 to pay off their mortgage, you have to pay taxes like you earned it. Depending on where you land in the tax bracket, taxes due could amount to as much as one-third of the total withdrawal. Instead, seniors should strategize with their tax professional and consider stretching out larger withdrawals over three or more 

Jordan works for Gerstle Rosen & Goldenberg, P.A.,  which has maintained its reputation for excellence and client satisfaction in the areas of accounting, auditing, taxation, divorce and fraud forensic, business consulting, governmental, not-for-profit, litigation support, other real estate and construction accounting, as well as federal, state and local governmental accounting, auditing, and consulting services.