The golden years should bring enough leisure time to enjoy life, as well as some useful tax benefits. Unfortunately, preparing the annual tax return will remain a necessary chore as your retirement rolls along. The tax laws do afford some advantages to senior citizens, as well as changes in the tax rates. Seniors should also keep in mind the tax treatment, on both federal and state returns, of retirement accounts and Social Security benefits.
Gross Income and Filing Requirements
If you are 65 or older, the IRS sets higher minimum gross income thresholds for the requirement to file a tax return. If you are single, that minimum for 2012 stood at $11,200. If you're filing a joint return, and one spouse is 65 or older, then the IRS requires a return if your income has reached at least $20,650; if both spouses are 65 or older, the minimum rises to $21,800. For qualified widows and widowers, the filing minimum in 2012 stood at $16,850.
If you have a traditional IRA, you can take penalty-free withdrawals after you reach the age of 59-1/2. If you hold a Roth IRA, the withdrawals are tax-free. The IRS requires that you begin taking regular periodic distributions from your traditional IRA by April 1 of the year after the year you reach the age of 70-1/2. If the distributions don't meet the minimums (according to your age and expected longevity), then the IRS slaps a steep excise tax on the amount you should have withdrawn but didn't. There is no such requirement for Roth IRAs.
Investments, Pensions and Annuities
The IRS applies the same rules on dividends, interest and capital gains no matter what your age. But if you are drawing income from an employee pension, the tax treatment depends on who made contributions to the account. The IRS will consider as taxable income any portion of a pension benefit contributed by your employer or another party; the portion you contributed from your wages is generally tax-exempt. The same is true of an annuity, but the IRS has a set of complicated rules in figuring your basis and the tax-free portion. As for the taxable portion, you'll pay taxes at the same rate you would pay on ordinary income.
A percentage of your Social Security benefits may be taxable; it all depends on the amount of other income you receive. The first step is to add up "combined income," which includes adjusted gross income, tax-free interest and half of your Social Security benefits. If you're single, you don't pay any tax on Social Security if your combined income is less than $25,000 (for joint filers, $32,000). Half of the Social Security is taxed for singles if combined income falls between $25,000 and $34,000 (joint filers, $32,000 and 44,000); if combined income exceeds these thresholds, then the IRS taxes 85 percent of your Social Security benefits.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.