It’s the great American dream. Work all your life and someday you’ll reach retirement age. You’ll be able to lounge happily on a beach somewhere, sipping fancy drinks with umbrellas and chunks of fruit. You’ll have plenty of money in the bank and at tax time, you’ll just continue to relax while those younger than you rush to meet the April 15 deadline. Unfortunately, though, reaching retirement age doesn’t automatically relieve you of paying income taxes. In fact, you may never be able to avoid paying taxes at all.
Requirements to File
You may or may not be free from paying income tax after age 70, depending on your circumstances. Income tax requirements are based on the nature and amount of your income, not your age. Since many of those who are age 70 and older earn below the income minimums, it’s common to generalize and say seniors aren’t required to file.
No matter what age you are, you may not have to file or pay income taxes, especially if you don’t earn a dollar of income during the tax year. But retirement typically gives you at least a little income to live on without working. Your filing status also determines how much money you can earn before you have to file a tax return. If you’re a single filer, that amount will obviously be much lower than if you are married filing jointly.
Social Security Taxability
If your only income is from Social Security, you won’t have to worry about filing taxes unless your spouse earned income during the tax year. Social Security is a form of unearned income, which is defined as passive income. While some forms of unearned income, such as bank interest and capital gains, are taxed, they are taxed at a different rate than money you earn.
At one time, Social Security was protected from taxation, but that changed with the Save Social Security plan passed by Congress. Although those taking only Social Security benefits are free from taxation, the IRS now has the right to take up to 85 percent of your Social Security earnings. If you earn money in addition to the check you receive each month from the Social Security Administration, you may be putting some of your income toward the government’s Medicare fund in the form of taxes.
Maximum Earned Income for Seniors
To calculate whether you need to file a tax return, set aside the money you earned from Social Security benefits during the tax year and look at your other income. If you’re single, you’ll need to file a return if you earned $11,900 or more. If you’re married filing jointly, that minimum goes up to $14,900. If you’re a widower with one or more dependent children, you can make up to $17,900 without being required to file.
How much you’ll have to pay is a little more complicated. You can use a Social Security tax calculator to help you determine how much you’ll owe. Basically, though, you’ll add your adjusted gross income and nontaxable interest to 50 percent of your Social Security benefit for the year to determine whether you’ll owe or not. If the total of that calculation is between $25,000 and $34,000, or $32,000 and $44,000 if married filing jointly, you’ll owe taxes on half of your Social Security earnings. If your income exceeds $34,000, or $44,000 for couples, you could pay taxes on as much as 85 percent of your Social Security income.
Retirement Savings Taxability
As you’re using the Social Security tax calculator, there are some other factors that could push you over the line. If you receive a pension or dividends from investments, that will be considered part of your income. Withdrawals from savings plans like your 401(k) or IRA will also push your income up.
According to the Social Security Administration, 40 percent of retirees pay federal income tax on at least some of their benefit. The average Social Security payout is only $1,411, which is $16,932 per year. Seniors who can’t live on $16,932 per year often find they must take part-time work or rely on other retirement savings plans to pay their living costs.
Reduce Your Income Tax Liability
If you’re concerned about paying income tax after age 70, there are some things you can do to prepare. Even if it doesn’t resolve your need to file altogether, you can at least reduce the amount you owe each year. If you haven’t already, look at areas of your budget where you can cut back in order to rely more heavily on your Social Security earnings than other income sources. But if that isn’t possible, there are a few other options.
If you haven’t turned 70 yet, look at some things you can do ahead of that date to reduce your income tax liability. Take a look at the Social Security benefits you’ll be receiving and determine exactly how much you’ll need from other sources. Taking withdrawals from your IRA before you sign up for Social Security can help minimize that extra income after you start receiving that check, since you’ll already have it in the bank. If you’ve chosen a Roth IRA for your retirement savings, you may also be able to withdraw your funds gradually in a way that reduces your retirement liability.
Of course, if you need to work a part-time job to bring in extra income, it’s important to crunch the numbers to see if it’s worth it. If your income is forcing you to give the IRS a large chunk of your Social Security benefits, you may find that the extra money you’re bringing in isn’t enough to offset the tax burden. You can use a Social Security tax calculator to determine how much you’ll owe and continue to monitor it as your projected annual income fluctuates throughout the year.
Paying on Social Security
The biggest problem with owing income tax on your Social Security benefits is that it won’t automatically be withheld from each check, as your taxes are from an employer. That means you could owe big in April, along with penalties for underpayment of taxes. If you expect to owe $1,000 or more at tax time, the IRS expects you to make estimated payments. That means four times each year, you’ll need to pay one-fourth of your anticipated taxes for the year. Since this isn’t an exact science, it may help to use the IRS’s calculator to determine how much you should pay.
If you’ll pay income tax after age 70 or at any age and it’s not being automatically withheld, you’ll need to use Form 1040-ES to determine the amount to send in. Form 1040-ES includes an estimated tax worksheet that asks the gross income you’ll expect for the tax year. You’ll need to scroll down to the section titled 2018 Self-Employment Tax and Deduction worksheet for Lines 1 and 9 of the estimated tax worksheet. Here you can input your Social Security payments. You can then transfer this information to the worksheet and use it to calculate your tax debt for the year.
At the bottom of the estimated tax worksheet, you’ll be directed to divide the total by four, then transfer the information to the Record of Estimated Tax Payments. This shows the exact deadlines for sending your payment to the IRS, which are always April 15, June 15, Sept. 15 and Jan. 15, unless any of those dates fall on a weekend or holiday, at which point they roll forward to the next workday. If you notice throughout the year that you’re making more or less than you thought, you can always adjust the amount you send. Over time, if your income remains fairly steady, you’ll know how much to send each year to avoid owing come April.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.