Tax Filing Tips for Retirees

Retirees' Taxes

Retirement marks the end of years of work, yet retirees still have the headache of taxes. Check out these tips to help keep those golden years simpler!

No one enjoys paying taxes, but it’s something we all have to do. When you’re young and don’t have too many income or financial responsibilities, filing your taxes is easy. You just fill out an EZ form online and (usually) get a refund.

But as you near retirement age, filing taxes often becomes much more complicated. The good news is that there are lots of ways retirees can lessen their tax liability at the end of the year.

Wish you could pay less to the IRS and keep more money in your pocket? With these five essential tax filing tips for retirees, you just might pull it off.

1. Have Your Taxes Withheld From 401k, IRA, and Pension Disbursements

Most retirees don’t earn income. Instead, they rely on disbursements from their 401ks, IRA accounts, pension plans, or other tax-advantaged accounts to get through their golden years. But what some people don’t realize is that those disbursements are treated like income, so you have to pay taxes on those withdrawals and payouts.

To avoid having to write a hefty check to the U.S. Treasury, have taxes withheld on payouts from retirement accounts and pension plans. If you have more withheld than you need to pay, you’ll get a refund when you file your returns.

Retirees should know that you also have to pay taxes on Social Security benefits.

When you first apply for Social Security benefit payments, be sure to fill out the W-4V form from the IRS. This form allows you to select the option to have taxes withheld voluntarily. Withholding taxes will reduce your monthly benefit but save you from having to make an IRS payment when you file taxes next year.  

2. Itemize Deductions So That You Can Deduct Medical Expenses

Every year, the IRS sets a standard deduction, an amount that gets subtracted from your income and earnings and reduces your tax burden. For 2021, the standard deduction is $12,650 for single taxpayers and $25,100 for married couples. But if you’re a retiree over the age of 65, the standard deduction is a bit higher.

The standard deduction  for single taxpayers over the age of 65 is $14,350. The standard deduction for married couples filing jointly is $25,100, plus an additional $1,350 for each spouse over 65, for a total of up to $27,800.

When you file taxes, you have the option to take the standard deduction or itemize your deductions. For the vast majority of Americans, the standard deduction is greater than the total of all of their itemized deductions. Yet, there are a few instances in which it can be beneficial to itemize your deductions instead.

For retirees with significant medical expenses, itemizing your deductions may be the way to go.

Here’s why:

If your medical expenses exceed 7.5% of your AGI (adjusted gross income), the excess amount above 7.5% can be included as part of your itemized deductions. This number may be far greater than the allowable standard deduction, depending on how much you've paid for medical care this year.

3. Don’t Ignore Special Tax Credits

There are some unique tax credits offered to retirees that you may be qualified to take. Two of the most popular ones are the tax credit for low-income elderly and the tax credit for disabled persons. These unique credits range from $3,750 to $7,500 each year.

As a single person, you may qualify to receive the low-income elderly tax credit if you are over 65 and your AGI is  less than $17,500 per year. As a married person filing jointly, if both spouses are over the age of 65, you can take this tax credit if you have a joint income of under $25,000 per year.

Similar tax credits (and similar thresholds to qualify) are also available for retired persons under 65. However, if you're under 65, you can only get this credit if you are permanently disabled and retired on permanent and total disability.

The IRS adjusts and amends tax credits from year to year, so this information is always subject to change. For the most up-to-date information, visit the IRS website or consult with a tax professional.

4. Reduce Your Tax Burden by Contributing to an IRA

The IRS sets an annual limit as to how much you can contribute to an IRA. Whether or not you contribute the full amount or a lesser amount, you don’t have to pay taxes on those funds.

As long as you have taxable income, people over 50 can make yearly IRA contributions of up to $7,000 per year. Keep in mind; this taxable income doesn’t have to come from a full-time job. Instead, it can result from a part-time job, occasional freelance work, or a side gig.

Are you part of a married couple where one of you is retired, and one still works?

You can reduce your tax burden if the working spouse continues to make IRA or 401k contributions until they retire. Once you turn 72, you’ll no longer be able to make those contributions; you’ll have to take the required minimum distributions instead.

5. Make Qualified Charitable Distributions

For some retirees, required minimum distributions and paying taxes on those distributions are a detriment to their financial situation. But there is a way around that:

Allow me to introduce the qualified charitable distribution or QCD.

You have the option to send all or part of your RMDs as charitable contributions directly from your IRA. By doing so, you can lower your tax burden for the year in which you make the QCD.

Why?

You can deduct the amount of your QCD from your adjusted gross income! It doesn't matter whether you itemize your deductions or take the standard deduction.

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Conclusion

Tax filing is complicated, in part because the IRS changes the rules from year to year. So even if you are aware of last year’s rules, deductions, and credits, they may be different this year or next year.

When in doubt, it’s always best to hire a financial advisor or a tax professional. A tax pro can guide you through the complex process of maximizing deductions and taking advantage of every credit you deserve.

Those free online tax filing services may be convenient, but paying a few hundred dollars for a tax pro can actually save you thousands more in the long run.

Caitlin Sinclair is the Property Manager at Harmony 3900 with five years of property management experience and many more in Customer Service. She shares her passion for her community and looks forward to making Harmony 3900 the place to call home.