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Tax Counseling For Seniors & The Elderly

Tax Counseling For Seniors & The Elderly


When you retire and begin to reduce your income from work, it becomes essential to take advantage of all the tax benefits available. This way, you will maximize your savings and help cover your living expenses.

Use this guide to tax tips for seniors and the elderly to learn everything you need to know about the taxes, credits, and deductions you may be eligible for.


Who qualifies as a retiree or senior?

Although "senior" and "retiree" are frequently used interchangeably. The tax code contains specific definitions used to assess your eligibility for tax exemption:

  • If you are under 65 and not disabled, you will not be eligible for the tax deductions available to seniors. This is often the case because you can retire at any age.

  • Retirees: The term "retiree" has no meaning in the tax code unless accompanied by a disability. In this case, it means that you are retired and unable to work due to a disability.

  • Seniors: Seniors are persons who turn 65 during the fiscal year. If you belong to this category, you can benefit from any tax exemptions reserved exclusively for seniors.


What tax options are available to seniors?

As a senior, you can claim various tax benefits in the form of deductions, credits, or exemptions.

Tax deductions work the same way as exemptions. Both help reduce taxable income, while tax credits reduce dollar-for-dollar tax liabilities. All things being equal, tax credits generally provide more bang for your buck.


Deductions

The first automatic tax advantage of being a senior comes from a higher standard deduction. At age 65, the IRS offers an additional amount on top of the standard deduction.

  • Single taxpayers aged 64 and under generally receive $12,550 for 2021, while single taxpayers aged 65 and over receive $14,250 for 2021.

  • That extra $1,700 makes claiming the standard deduction even more likely than choosing to claim it, which simplifies preparing your tax return.

  • If you fall into the 22% tax bracket, it can save you up to $374 a year in taxes.

  • If you are married and only one of you is 65 or older, for the 2021 tax year, you will only receive $1,350 or an additional $2,700 if you are both 65 or older.

Depending on your circumstance, you may be able to continue contributing to Individual Retirement Accounts (IRAs) after retirement, serving as an additional tax deduction.

  • For this, it is necessary to have received work income in the contribution year.

  • If your spouse continues to work, you can contribute up to $7,000 ($6,000 + $1,000 additional contributions) to an account in your name.

  • This requires that your spouse has sufficient income to contribute to your account and yours if you wish.


Credits

Suppose you are 65 or older at the end of the fiscal year (or younger than 65 and permanently disabled and fully retired with disability income). In that case, you may be eligible for the Personal Tax Credit for the elderly or disabled.

This credit allows you to offset part of your tax burden, and your income must be within certain limits. A tax professional can do the math for you and tell you how much credit you're eligible for. In addition, the professional will inform you of all income limits tax breaks applicable to all seniors and elderly.


Exemptions

Personal federal tax exemptions disappeared with the Tax Cuts and Jobs Act for fiscal years 2018 through 2025. But some states offer tax exemptions for certain types of pension income or property taxes.


How can seniors and the elderly manage their IRAs and RMDs?

The deferral of your pension savings tax does not last forever. In the past, seniors were required to begin receiving distributions from retirement accounts at age 70½.

Now, according to the SECURE Act, you should generally start making distributions from the year you turn 72. These compulsory distributions are called required minimum distributions (RMDs). The law requires that a minimum amount of money be withdrawn by April 1 of the year following the age of 72 and then that annual distributions be made before December 31 of each year.

There are two simple exceptions to this rule, and the first only applies to 2020:

  1. CARES Act temporarily suspended RMDs due to market volatility due to the COVID-19 pandemic, allowing older people to keep money in their accounts longer.

  2. If you are still working at age 72 or older and have a 401(k), you may not need to withdraw your 401(k) funds from your current employer-sponsored plan until you stop working for that employer.

However, if you've invested in a traditional IRA, you should still receive annual distributions, despite still working. If you have a Roth-IRA and have made after-tax contributions, you won't have to withdraw money from your account while you're alive.

Required minimum distributions work by basing the distribution on your account balance and then factoring in a life expectancy factor defined by the IRS in Publication 590.

Divide the balance in your account by this factor to arrive at the RMD value. Not taking all of your RMD can result in a huge fine: 50% of the amount you didn't withdraw.

You can take out more than the required minimum amount from your account at any time, but you will likely have to pay tax on your marginal income for additional withdrawals. To make your life easier, you can ask your retirement account holder to deduct taxes from your distributions. This will send tax payments on your behalf and hopefully avoid a surprise bill when you prepare your taxes in April.


Are there tax exemptions for the elderly?

Some states offer tax exemptions for senior citizens, offering various items. Examples may include:

  • Exempting property tax payments up to a certain threshold.

  • Freezing the property tax bill.

  • Deferring property tax payments.

When moving to another state with lower taxes, consider the general tax burden. Just because a state offers property tax exemptions or has no income tax doesn't mean it doesn't pay more through other taxes.

Be sure to read the fine print to determine how to qualify for these property tax exemptions, whether they are exemptions, loans, freeze rates, or arrears. They may have different restrictions and qualifications depending on age, income, and length of residence or more.


Are there any special tax forms or support for seniors?

Once you turn 65, you can start filing your taxes with Form 1040-SR, designed specifically for seniors.

If you prepare your returns manually, this can help you prepare by using a larger font and standard deduction information right on the form. Otherwise, the 1040-SR form remains the same as the 1040 Form.

Suppose you need help preparing your tax return. In that case, you may be eligible to participate in the IRS Voluntary Income Tax Assistance (VITA) and Senior Tax Counseling programs, which provide free tax assistance.


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