When you retire or reach a certain age, you may no longer have to do certain things. You may save yourself the commute or qualify for great discounts. But no matter how old you are, you can’t get out of paying taxes. It’s important to understand why seniors are still taxed, what taxes they typically pay, and how you can minimize your tax burden. If you need individual help preparing for retirement or creating a tax strategy, you can Financial Advisor.
At what age can you stop filing taxes?
Taxes are not determined by age, so you are never too old to pay taxes. If you are 65 or older, have to file a tax return in 2022 if your gross income is $14,700 or more. If you are married and filing a joint return and both are age 65 or older, this amount is $28,700. If you are married and filing a joint return and only one of you is age 65 or older, this amount is $27,300.
However, there is one situation where you can say goodbye to taxes. If your only income is social security contributions, you do not have to pay taxes and you probably not necessary file a tax return.
General taxes paid by seniors
If you’re 65 or older, you may also be retired or partially retired and receiving payouts from your retirement savings. Retirement savings and investments can be subject to more complex tax rules than income, where you often have taxes automatically deducted from each paycheck and a W-2 form at the end of each year. Here are some of the most common taxes retirees pay and how they work.
Social security taxes
If you have significant retirement income other than Social Security, you may need to Pay income tax on your Social Security benefits. The percentage of your Social Security benefits who are subject to tax depends on your total income. Total income is defined as your adjusted gross income plus tax-free interest plus half of your Social Security benefits.
If you file your taxes individually and your total income is between $25,000 and $34,000, you may have to pay taxes on 50% of your Social Security benefits. If your total income is over $34,000, you may have to pay taxes on up to 85% of your benefits.
If you file a joint tax return and your and your partner’s combined income is $32,000 to $44,000, you may have to pay income taxes on 50% of your Social Security benefits. If that amount is over $44,000, you may have to pay taxes on 85% of your benefits.
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Common retirement accounts
IRAs, 401(k) plans and other popular retirement savings are subject to different tax treatment. Generally, some are taxed up front and others are taxed when withdrawn. For example, IRAs funded with money that’s already been taxed — say you take $1,000 from your paycheck and put it in a Roth IRA — aren’t taxed when you withdraw that money in retirement, as long as you meet the IRS’s requirements.
401(k) plans, on the other hand, are typically funded with tax-free money, so you usually have to pay income tax on withdrawals in the year you make the withdrawal.
Pension taxes
Like 401(k) plans, annuities are typically funded with tax-free funds, so you’ll pay federal income taxes on withdrawals in the year the payout is made. If you receive a lump sum payment rather than annual or periodic payments, you’ll pay the entire tax liability in the year the payout is made.
In many cases, your employer through whom you receive your pension will withhold taxes when paying out your pension payments, which can help reduce your tax burden.
How to minimize taxes as a senior citizen
Although seniors cannot avoid taxes entirely, there are several ways to save on taxes once they reach a certain age. Here are some of them.
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Benefit from the tax advantage for seniors: The Credit for seniors and disabled people is worth between $3,750 and $7,500. You can the IRS tool to see if you qualify and how much your credit might be. Generally speaking, you must be 65 or older and have less than $17,500 in adjusted gross income if you file alone or as head of household – that limit rises to $20,000 if you’re married filing a joint return and only one spouse is 65 or older, and $25,000 if you’re married filing a joint return and both are 65 or older.
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Take advantage of your larger flat-rate deduction: If you are 65 years or older and do not itemize deductions, you are entitled to a higher flat-rate deduction. A single person over 65 gets an additional deduction of $1,750, a couple filing jointly gets an additional $1,400 for each partner who is 65 or older. So if only one spouse is 65 or older, the additional deduction amount is $1,400, but if both are 65 or older, it is $2,800.
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People aged 50 and over can make “catch-up contributions” to their pension accounts: The contribution limit for a traditional or Roth IRA is $6,500 in 2023, up from $6,000 in 2022, but if you’re 50 or older, you’ll get an extra $1,000. The contribution limit for a 401(k) plan is $22,500 in 2023, up from $20,500 in 2022, and those 50 and older will get an extra $7,500, up from $6,500 in 2022. Contributing to a tax-advantaged retirement account will reduce the amount of income tax you owe, helping you make your retirement more secure.
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You’re not alone: If you feel overwhelmed with handling tax credits or understanding changing catch-up limits, you don’t have to do it alone. Use Free tax assistance from the IRS for persons aged 60 and over or free AARP tax help for people aged 50 and over with low or middle incomes.
Contact a financial advisor if you need help with your retirement and tax goals.
The conclusion
Unless you have income other than Social Security, you’ll likely still have to pay taxes. The good news is that there are tax credits and other strategies you can use to keep your tax bill low. You may want to work with a financial advisor to make sure you have a clear tax strategy in place during retirement.
Tips for saving taxes in retirement
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A Financial Advisor can help you build a retirement income plan. Finding a financial advisor doesn’t have to be difficult. The free tool from SmartAsset matches you with up to three certified financial advisors in your area, and you can interview your advisors for free to help you decide which one is right for you. If you are ready to create a comprehensive retirement plan, get started now. You can also read SmartAsset reviews.
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Use The SmartAsset pension calculator to make sure your retirement savings plan will see you through – or learn how to adjust your savings strategy to make your plan work.
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Taxes aren’t the only unexpected expense in retirement – consider your Medicare costs when planning your retirement income. Read SmartAsset’s guide to Medicare Part A, part B, Part C And Part D.
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Have an emergency fund ready in case unexpected expenses arise. An emergency fund should be liquid – in an account that is not exposed to the risk of large fluctuations like the stock market. The downside is that the value of liquid cash can be eroded by inflation. However, a high-yield account allows you to earn compound interest. Compare savings accounts from these banks.
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The article “Will seniors ever stop paying taxes?” first appeared in the SmartAsset blog.