Tax breaks in retirement | Business | #retirement | #elderly | #seniors
Question: What tax breaks are available for retirees and those soon to retire?
Answer: For retirees – especially those on fixed incomes, it is important to take full advantage of applicable tax benefits to help their retirement savings last for their respective lifetimes.
Reducing tax liability also is important since withholding money from current retirement income, normally used for living expenses, to pay taxes likely is more difficult because of lingering effects of the pandemic economic downturn. Fortunately, the Tax Cuts and Jobs Act of 2017 offers tax breaks, including an additional standard deduction for those 65 and older.
For the 2020 tax year, the IRS allows qualifying seniors to add an extra $1,650 to the standard deduction for a single or qualified head of household as well as an additional $1,300 for a spouse aged 65 or older, if married and filing a joint return. To qualify, both taxpayers on a joint return must be 65 by the last day of the tax year.
All taxpayers, including seniors, have a choice of either standard or itemized deductions, but usually not both. While TCJA almost doubled standard deductions, it also set new limits on itemizing, such as for state/local income taxes, property taxes as well as eliminating personal exemptions.
The standard deduction, plus the extra allowance for age, may be preferable to itemizing deductions for older taxpayers, particularly if their mortgages are paid off, according to The Balance website. However, if mortgage interest, property taxes, medical bills, charitable donations and other allowable expenses are great enough, itemizing deductions may be advantageous.
On the income side, Social Security benefits may or may not be tax-exempt depending on a taxpayer’s overall earnings. To determine that, start by adding up income from all sources, including taxable retirement payments, other than Social Security, as well as any wages, investment income and qualifying interest.
To that total add half of Social Security benefits paid during the tax year. The Social Security Administration (SSA) will send Form SSA-1099 showing the annual amount paid.
SSA benefits are not considered taxable if the total of all other income, plus half of benefit payments, is less than $25,000 for the year for a single head of household, or a qualifying widow or widower, according SSA. Eligible joint return filers can earn up to $26,100 if one is 65 or older. If both are 65 or older, a couple can jointly earn up to $27,400.
Individual filers earnings between $25,000 and $34,000 can expect to pay income taxes on up to 50 percent of benefits. Those making more than $34,000 can expect to pay taxes on up to 85 percent of benefits.
If self-employed but receiving Medicare, seniors can deduct Parts B and D premiums, plus the cost of a Medicare Advantage supplemental plan. These deductions are available whether you itemize and are not subject to the 7.5 percent of adjusted gross income test that applies to itemized medical expenses, according to the IRS.
There is an exception. Claims for medical expense deductions are not eligible if a senior taxpayer is covered under an employer-subsidized health plan – such as retiree medical coverage – or spouse’s employer family medical insurance.
Even with allowable deductions, retirees still may owe particularly if their tax liability is more than $1,000 over total withholdings for the year. In that case, making estimated tax payments quarterly could help avoid possible penalties for underpayment.
For retirees, tax planning should be a year-round activity in order to take advantage of all applicable deductions, especially those meant for senior taxpayers.
Michael Bateman is retiree who previously worked in marketing and corporate communications.