Tips to help seniors at tax time.
Jerry sits near the door at the last stop for retirees and others who are receiving free tax help one cold, but sunny, March day at City Hall in Warren, Mich. He makes sure the tax filers authorize that returns can be electronically filed and he reviews returns, too.
At 91, he's been volunteering nearly 31 years to prepare taxes for the AARP Foundation Tax-Aide service.
"I was doing it when we did it on paper," said Jerry, who, like other volunteers, goes by just a first name. The volunteers do not use a last name because they don't want to be called at home to answer tax questions or track down refunds.
Many retirees and those on modest incomes who use the free services appreciate being able to save $200 or more on tax preparation, even if they need to make a second trip to a tax site because the time slots for the free service fill up quickly.
The volunteers see it all. Some tax filers pack their financial story into plastic grocery bags to be sorted out on a tax return. Some remember a tax filer being pretty upset to be told that yes, you did earn enough that your Social Security benefits will be taxed on this return.
"They're confused because they listen to a lot of people other than their tax preparer," said John J., 81, a retired CPA who lives in Grosse Pointe Woods, Mich., and is a district coordinator for the AARP Tax-Aide sites. Volunteers are trained to fill out basic schedules, but taxpayers with more complex returns are advised to seek paid tax assistance.
As more Baby Boomers move into their retirement years, they're needing to understand different tax breaks and rules, too. The AARP's site at aarp.org/taxaidealso offers information on frequently asked tax questions and will let you submit questions online.
Here are five tips to consider for seniors:
Are your Social Security benefits taxable?
Many retirees who receive Social Security — and have extra income from a job or other source — face the challenge of figuring out whether they will need to pay income taxes on some Social Security benefits.
The IRS points out one quick way. See Form SSA-1099, the Social Security Benefit Statement, to show you how much you received in Social Security benefits. Your total benefit is shown in Box 3.
First, add one-half of all your Social Security benefits to all your other income,
including any tax-exempt interest. This is called your "provisional income."
Generally, some Social Security benefits are taxable for singles if your total provisional income is more than $25,000. Or some benefits would be taxable if your total provisional income is more than $32,000 for married couples filing jointly.
You can go to www.irs.gov and use an interactive tool to see whether any Social Security benefits are taxable.
What about medical expenses?
For the 2013 tax year, some seniors are able to hold onto a better federal income tax break relating to medical and dental expenses, said Diane Aksten, a certified public accountant at George W. Smith & Co.
If you are 65 or older, you can deduct medical expenses that are greater than 7.5%
of your adjusted gross income. This works even if your spouse is 65 or older and you're younger. But this break only applies from 2013 through 2016. Starting in 2017, the threshold goes to 10%. Taxpayers not in that age group cannot deduct medical expenses in 2013 unless they exceed 10% of your adjusted gross income.
What if I cannot itemize deductions?
If you were 65 or older at the end of 2013, you're eligible for a larger standard deduction. If both spouses are 65 or older, they can claim a standard deduction of $14,600 on a 2013 return — or an extra $2,400 for the standard deduction. Singles who are 65 and up can claim a standard deduction of $7,600 — or $1,500 higher than younger singles.
If you have high mortgage payments, large charitable contributions and other deductions, however, it still is best to compare itemizing deductions with taking the standard deduction.
What about retirement distributions?
Once you hit age 59 1/2, you are able to take out money from your IRA or 401(k) without a penalty. But those distributions are usually taxable.
There are some exceptions to avoid the 10% early-withdrawal penalty for distributions taken out before age 59 1/2, too.
The 10% additional penalty, for example, does not apply to distributions that are made because you are totally and permanently disabled. Or made from a qualified employer-sponsored plan after your separation from service in or after the year you reached age 55.
Some other exceptions exist, too. Be careful, though, some exceptions apply only to IRAs or to employer plans, such as a 401(k), said Jackie Perlman, principal tax research analyst from the Tax Institute at H&R Block.
When do older seniors need to withdraw money from retirement savings?
When you hit age 70 1/2, you need to take care of required minimum distributions each year.
You can delay required distributions from your employer's plan until you retire from that employer — but IRA distributions must start at 70 1/2 no matter what.
If you did not take the required minimum amount in your 70 1/2 year, then you must receive distributions by April 1 of the following year.
The required minimum distribution for any year after you turn 70 1/2 must be made by Dec. 31 of that year. And there's a complex set of calculations to figure out that required distribution based on age and amount of savings.
Taking your required minimum distribution in time is necessary because there is a rather large penalty for failing to take out that required amount each year.
If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.
Roth IRAs are treated differently from traditional IRAs for both contribution and withdrawal rules.
Minimum distributions are not required for Roths.