Elder Law

Income Tax Counseling for the Elderly

The Tax Counseling for the Elderly (TCE) Cooperative Agreement Program helps organizations provide free tax counseling and assistance to elderly individuals in the preparation of their federal income tax returns. Trained volunteers from non-profit organizations provide free tax counseling and basic income tax return preparation for senior citizens. When you go for tax counseling, you may want to discuss the income tax return items that are in this article with your counselor.

Who Must File an Income Tax Return

In 2008, elderly persons need to file a tax return only if their gross income, not counting Social Security benefits, exceeds $10,300 for a single person or $20,000 for an elderly couple.

Filing Status

The filing status of an elderly person determines their tax rate. There are five filing statuses: single, married filing jointly, married filing separately, qualifying widow(er) and head of household.

Usually unmarried individuals must file as single persons, and most individuals who are married as of the close of the taxable year must file either jointly or married filing separately. Generally, a married couple will want to file a joint return because they will pay less tax on their combined income than they would pay if they filed separate returns. Single elderly persons responsible for their grandchildren, or single adults caring for their elderly parents, may save on taxes by choosing the ''head of household'' filing status because a separate rate schedule lower than that for a single person applies to a head of household.

Tax Rates and Exemptions

An elderly taxpayer may deduct an exemption for self, spouse and dependents. Tax rates for ordinary income are 10, 15, 25, 28, 33 or 35 percent of taxable income. Capital gain usually is taxed at lower rates. No exemption is allowed to a taxpayer, such as an elderly parent, who can be claimed by another taxpayer, such as their adult child who is caring for the parent.

Gross Income

Gross income includes income from any source, whether in money, property or services, but certain types of income enjoy favorable tax treatment. Elderly persons receive income from many different sources as a result of a lifetime of employment, investment and other income-producing activity. Some of this income may receive special treatment because of its source or the taxpayer's age.

Gross income includes severance pay, retirement pay and allowances. Gifts and inheritances are not included in gross income, but instead may be subject to estate and gift taxes. Income earned on property received as gifts and inheritances, however, is taxable as income and must be included in gross income.

Gross income does not include amounts received by a taxpayer for supportive services or as reimbursement for out-of-pocket expenses in connection with the following programs: Retired Senior Volunteer Program (RSVP), Foster Grandparents, Senior Companion Program, Service Corps of Retired Executives (SCORE) and Active Corps of Executives (ACE).

Life Insurance Proceeds

Life insurance proceeds payable by reason of insured's death are not subject to income tax. Also exempt from taxes are insurance proceeds paid to terminally ill insureds or to finance long-term care of chronically ill insureds.

College Savings Options

Numerous tax-favored options exist for saving for and paying for a child's or grandchild's college education, including state-sponsored college savings and prepaid tuition plans, the Coverdell education IRA, US savings bonds, and the HOPE and lifetime learning tax credits.

Compensation for Injury or Sickness

Payments received as compensation for injury or illness are excluded from gross income. Older persons nearing retirement who experience illness, injury or disability often receive payments of various types based on their physical condition. If the payment is considered compensation for injury or sickness, it generally is excluded from gross income. If, however, the payment is a disability benefit payable in lieu of wages, it is not covered by the exclusion but may qualify for a tax credit.

Sale of a Personal Residence

Equity in a principal residence is the largest component of wealth of most older Americans. Most older Americans desire to stay in their own homes, but that is not always possible. Upon removal to an institution, the home must often be sold. Sometimes a sale will be necessitated by the smaller inflows of cash following retirement. Sellers of principal residences may exclude up to $500,000 of gain on sale if married or $250,000 if single.

Neither current nor former law extends favorable tax treatment to residences sold at a loss. Losses on the sale of personal use assets, including a personal residence, are not deductible.

Types of Deductions

To compute your tax, first you need to figure out your taxable income, which is gross income less deductions. All taxpayers are eligible to reduce gross income by a series of deductions known as adjustments to gross income. The resulting figure is known as ''adjusted gross income'' (AGI). A taxpayer may then either reduce their AGI by a set figure known as the standard deduction or they may instead elect to itemize their remaining deductions. The amount of the standard deduction varies depending on the taxpayer's filing status.

Credit for the Elderly or Disabled

Elderly or disabled persons with modest incomes may be eligible for a special tax credit. US citizens or residents may qualify for this credit if by the end of the taxable year they are at least age 65 or, if under age 65, are retired due to permanent and total disability. In order to claim the credit, the taxpayer must file a Form 1040. The credit cannot be claimed on either a Form 1040EZ or Form 1040A.

Credit for Dependent's Care

Working taxpayers who care for disabled elderly parents or spouses may qualify for a tax credit for caretaker expenses which enable the taxpayer to hold or search for a job. Because this tax-saving device is a credit rather than a deduction, it results in a dollar-for-dollar reduction in the tax obligation, independent of the caregiver's tax bracket.

Questions for Your Attorney

You may want to ask your attorney the following questions:

  • How much experience do you have with elder law cases?
  • Do you have references that I can contact, preferably elder law case clients?
  • My mother is 80 years old and her only sources of income are from a pension and Social Security, does she need to file a federal tax return?
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