Society of Certified Senior Advisors: Tax Tips for Older Adults

Tax time doesn’t need to be stressful. We offer suggestions for filling out your return and how to get ready for next year.

Most of us dread tax season and the accompanying need to dig for receipts, add up income, and live in fear of a big, unexpected IRS bill. Even math experts have trouble navigating tax law, while ordinary mortals quake at the thought of figuring out their Social Security tax burden. This doesn’t have to be you.

We’ll walk through tax law specific to seniors, take a look at how to prepare for next year, and cover free services available to help you file your taxes.

Deductions, Credits, and Exemptions

If you turn 65 during the tax (calendar) year, then you’re considered a “senior” for that year by the IRS and you qualify for certain tax breaks. Your retirement status makes no difference unless it’s due to a disability. Seniors are able to benefit from a number of deductions, credits, and exemptions. Deductions and exemptions lower taxable liability on a dollar-for-dollar basis. Tax credit, on the other hand, is an amount of money taxpayers can subtract directly from the amount they owe.

Budgeting Tools Make Tax Time Easier

If you dread tax time in part because you are a lousy record keeper, you may benefit from a free budgeting tool that itemizes your income and expenditures. Two of the best are Mint (owned by TurboTax parent Intuit) and Personal Capital. These handy sites gather your financial data and allow you to break down income and spending into multiple categories. For instance, was that gas you bought a business expense or for vacation? Was that income from a rental or your eBay business? The beauty of managing these categories day by day, month by month, is that at the end of the year you can look up totals for any category.

Thus, you can easily find total business expenses, utility bills (to write off a home business), income related to different categories, and much, much more. Yes, you still need to keep receipts but you can throw those in separate folders and take photos to add them to phone files monthly or all at once at the end of the year. No more adding them up receipt by receipt!

Seniors get a bigger standard deduction than younger people. For 2021, seniors can deduct $14,250 instead of $12,550, a difference of $1,700. In practical terms, that means that if you are in the 22% tax bracket, you would save up to $374. Be aware that spouses must qualify individually and get a slightly smaller $1,350 (or $2,700 for both).

Another deduction that is great for working seniors is the one you get by contributing to an individual retirement account (IRA). Earned income can be contributed up to $7,000 ($6,000 plus a $1,000 catch-up for those aged 50 or older). Even better, one working spouse can make contributions for a spouse, as long as earnings are enough to cover both amounts.

On to credits. Those with limited income may qualify for the Tax Credit for the Elderly and Disabled. Check here to see if you qualify.

While personal exemptions are on hold through 2025 at the federal level, you should Google “personal exemptions” and your state to find any that may exist at the state level. Some states allow exemptions on certain retirement income and/or property taxes, for example.

Social Security

You thought Social Security benefits were a handout … but Uncle Sam takes back a share in taxes on up to 85% based on your income, or the combined income of you and a spouse. That combined income is made up of your adjusted gross income plus nontaxable interest and half of your Social Security benefits. For a detailed explanation and worksheet, click here.

Required Minimum Distributions

If you have a retirement account, such as a 401(k) or traditional IRA, you will need to begin taking mandatory distributions at age 72. Your money has grown tax-free, usually for decades, and the government is ready and waiting to get its portion. Unless your money is in a ROTH account or certain 401(k)s at a company you are still working for, the tax bell is tolling for you.

The IRS uses a formula based on life expectancy and a percentage of the amount in your account(s) as of December 31 the year prior. So, for instance, your balance on December 31 of 2021 will determine your RMD for 2022. There’s no need for you to figure it out the hard way; enter that balance(s) into an RMD Calculator and even get projected amounts for future years. Don’t forget to take your RMD, since the penalty for not doing so is a hefty 50% of the amount you forgot to withdraw.

To avoid getting in a bad situation, have your broker calculate and withdraw your RMD every year. It can be taken on a monthly, quarterly or any other basis, although leaving it in until the end of the year allows your money more time to grow. Your broker is also able to withhold taxes (state and federal) at your direction so you won’t have to worry about liability at year’s end. You can even remove more than the RMD, but remember that everything you withdraw gets taxed as ordinary income except if you decide to donate some or all of your RMD up to $100,000 to a qualified charity per IRS rules.

Tax Forms for Older Adults

There’s a special form seniors can use called a 1040-SR. While it won’t automatically populate with your data, it does have larger font and the larger, personal deduction for seniors listed. Otherwise, it is identical to Form 1040.

Tax Filing Assistance

Check if you qualify for the IRS Volunteer Income Tax Assistance (VITA) (which provides free tax return assistance for individuals making $57,000 or less, persons with disabilities, and those who speak limited English) or Tax Counseling for the Elderly (tax counseling for people 60 and up) IRS programs.

Both of these programs are managed by the IRS but staffed by partners and volunteers, many of whom are retirees themselves. The services are always free and all volunteers have to pass tax law training that meets or exceeds IRS standards. Check here for a list of what to bring so you have all the documents and information needed to fill out your tax forms.