If you buy a new house, have a baby, or send a child to college, there are tax benefits, deductions and rules and those are discussed often, by me and others. What about for taxpayers that are at least 59 ½ years old or are retired or are approaching either or both of those? Well, there are some special tax rules for you too. In fact, retiring from the workforce or considering it soon and approaching age 60 or older, involve some of the most complex life changes affecting tax returns - and mostly in a good way.
First, for older taxpayers there is a higher standard deduction. The tax code allows an additional $1,500 of standard deduction for Single and Head of Household taxpayers or $1,200 for Married Filing Jointly, Married Filing Separately, and Qualifying Widow if they are 65 or older. This much higher standard deduction means most older taxpayers no longer have to itemize deductions.
If you do continue to itemize deductions, the deduction from medical expenses remains 7.5 percent of adjusted gross income until 2017, when the deduction amount increases to 10 percent matching the younger taxpayers. But unlike their younger counterparts, older taxpayers often have higher medical expenses, such as the medical care cost for a nursing home, assisted living facility or even home health care costs. By combining higher medical costs, with lower income, you have a situation where taxpayers may be able to take a medical expense deduction on their tax return for the first time.
Next, while many taxpayers feel their Social Security benefits aren't taxable, this is not fully true. Benefits may be taxable if total income plus one half of the Social Security benefits paid to the taxpayer, and spouse, plus any tax-exempt interest and dividends is greater than a pre-set base amount of $25,000 ($32,000 if Married Filing Jointly and $0 for Married Filing Separately taxpayers who live together during the year). However, no more than 85 percent of benefits may be taxed. If a taxpayer works after starting to receive benefits, they will still have to pay their Social Security and Medicare taxes. Sound confusing? Here's what you need to know: a portion of your Social Security benefits, up to 85 percent of them, may be taxable if you have other income.
How about pensions and traditional IRAs or Individual Retirement Accounts? Retirement accounts are some of the most confusing areas of tax law, but we will cover a high-level overview here. Withdrawals from non-Roth plans are subject to income tax, but not subject to the additional 10 percent tax if the taxpayer is older than 59½. Taxpayers can continue to contribute to their pension plan as long as they are still working regardless of their age. Once retired, taxpayers must start withdrawing from their pension plan if they are age 70½ or older. Some plans require participants to start withdrawing once they reach age 70½ even if they are still employed. If you are getting close to age 70½ and still working, check with your employer's plan administrator to find out if you must start withdrawing funds at age 70½. The Required Minimum Distribution (RMD) is based on the life expectancy for your age and is generally calculated by your plan administrator.
Contributions to a traditional IRA are no longer allowed once a taxpayer reaches age 70½, even if you are still working. You must start withdrawing annual minimum distributions. The RMD is based on the life expectancy for your age and the value of your traditional IRAs. If you have multiple IRAs, you don't have to combine them when you are under RMD rules, but you do need to keep track of the annual value of each IRA as you must withdraw enough to meet the minimum requirement for each IRA. You can withdraw the money from any of your IRAs. For tax year 2013, if you directed your plan trustee to transfer money directly from your IRA to a qualified charitable organization, up to $100,000 of these contributions are not subject to income tax and are not eligible for a charitable contribution on the tax return. The transfers are eligible for the annual RMD. There is a penalty of 50 percent of the required distribution if you miss your annual required distribution so make sure you stay on top of this. If you aren't sure, or you missed your annual distribution, check with a Tax Pro, they can help you with your distributions and any potential penalty. Retirement accounts are complicated and not just because of where to invest or how much. The real complexity comes in to play once you start taking money out or have to under the law. Be sure you pay the minimum tax you can by withdrawing wisely and with the best tax outcome.
Taxes can be complex regardless of your age, but even more so when you retire, start drawing Social Security benefits, or just start to withdraw from your IRA. These days it is rare to see a retiree with a simple pension and social security. Many taxpayers have numerous accounts set up over years with varying tax issues on each. There is a lot of help for older taxpayers beginning with free tax help from the Tax Counseling for the Elderly (TCE) to very knowledgeable Tax Pros in your community. Check with a local Tax Pro if you aren't sure about your taxes now that you have retired.
Remember you worked long and hard to save that retirement money. Now is the time to be wise about paying the least amount of taxes you can and keep all that you can. Be wise about your taxes and keep more of your money now and through your retirement years.