Elder Law

Older Adults and Income Tax

Usually, people who retire earn less income and therefore owe less income tax. However, individuals with a generous retirement income may still owe significant taxes.

If you are required to file an income tax return and fail to do so, the IRS may add penalty and interest charges on any tax you owe.

Exemptions Are Higher

Taxpayers age 65 and older are allowed to earn more income before they are required to file taxes. For tax year 2012, they can earn $11,200 if single, $13,950 if head of household, $21,800 if married filing jointly (or $20,650 if only one spouse is 65 or older) and $16,850 if a qualifying widow or widower. Each tax year, these amounts increase slightly.

This amount does not include Social Security benefits. If a person earns only Social Security, then his or her gross income equals zero and there is no need to file a federal income tax return. However, if you qualify for a refundable credit and want to receive it, you must file an income tax return to do so.

Retirement Plans

In addition to Social Security, retirees often receive income from retirement plans. Seniors will pay taxes on most retirement income, including pensions and distributions from IRAs, 401(k) plans and defined benefit plans. Taxes do not apply to qualified withdrawals from plans originally funded with after-tax dollars.

Other Sources of Income

Other sources of income might include wages, self-employment, rental income, interest, dividends and capital gains. Taxes must be paid on this income. Often, much of an older person’s wealth consists of equity in a home. If a home is sold, capital gains tax is owed on profits exceeding $250,000 for an individual or $500,000 for a married couple. The rate to be paid depends on tax bracket.

When Social Security Is Taxed

When an individual has income in addition to Social Security, Social Security benefits can be taxed. If a person’s adjusted gross income plus half of his or her Social Security benefit is more than $25,000 ($32,000 if married), the IRS will levy income tax on half of the Social Security Benefits. If this amount is more than $34,000 ($44,000 if married), the IRS will tax 85 percent of the Social Security benefits.

Credits and Deductions

The Credit for the Elderly or the Disabled is available to low-income taxpayers, age 65 and older. It is available to those with an adjusted gross income under $17,500 for an individual or $25,000 for a couple. The maximum credit for 2012 is $1,125.

Elderly individuals with low income and high medical and dental expenses can deduct these when the total amount exceeds 7.5 percent of the tax filer’s adjusted gross income.

Help Is Available

Wealthier retirees can seek help with their income taxes from lawyers or accountants. Those with fewer resources can access help from a number of government-funded programs, including the IRS Volunteer Income Tax Assistance (VITA) program and the Tax Counseling for the Elderly (TCE) program. Tax assistance is also provided by AARP.

A Tax or Elder Lawyer Can Help

The law surrounding federal income taxes and older adults can be complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax or elder lawyer.

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