Income Tax Filing Requirements For Retired People
The Internal Revenue Service imposes taxes on a variety of unearned income sources such as interest, dividends and withdrawals from certain retirement accounts that can force retirees to file tax returns. Requirements for filing income tax returns depend on age rather than employment status. If you are under age 65, you face different filing requirements than those who are 65 or older regardless of whether you are employed or retired.
How Can I Be Sure About The Tax I Owed On My 2017 Tax Return
If you do not have a copy of your 2017 Tax Return, you can get a free transcript of your 2017 tax record and three prior years tax records immediately by going online at IRS.gov. You can also get past years transcripts within five to 10 days from the time IRS receives your request by phone, by mail, or by fax. To view and print your transcripts online, go to IRS.gov and use the Get Transcript tool. To order by phone, call and follow the prompts. You can also request your transcript using your smartphone with the IRS2Go mobile phone app.
Tax Situations That Face Retirees
Retirees who don’t earn a wage any longer may not have to file a tax return if their only income comes from Social Security. However, if you’re retired from your previous career and working part time in another field, you may still have to file a return if you earn more than your filing threshold. Similarly, if you’re earning income as a result of a hobby or from a self-employment venture, you’ll likely have to file a tax return.
Many retired individuals draw a regular retirement distribution from their previous employers. If the distributions come from a tax-deferred plan such as a 401 or a traditional IRA, then retirees will owe income tax on these payments. On the other hand, if a retiree is receiving distributions from a Roth IRA, then these payments are generally tax-free.
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Standard Deductions For Retirees
The standard deductions for 2021 are used on tax returns filed in 2022. The standard deduction for 2021 is $12,550 for single taxpayers and married taxpayers filing separately $25,100 for married taxpayers filing jointly, and $18,800 for heads of household.
In the tax year 2022, the standard deduction for married couples filing jointly rises to $25,900, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,95, up $400, and for heads of households, the standard deduction will be $19,400, up $600.
In addition, taxpayers who are 65 years of age or olderwhether or not they are retiredare eligible for an extra standard deduction of $1,700 for 2021 if they are single or heads of household and an extra $1,350 for 2021 per senior spouse if they are married filing jointly, married filing separately, or a qualified widow.
|Standard Deductions for Taxpayers Age 65 or Over, Tax Year 2021
* If not a surviving spouse, otherwise $1,350 in 2021 and $1,400 in 2022.
If your taxable total income is less than these amounts, you wont owe any taxes. You usually wont even have to file a tax return , though you may want to anyway. Filing a return allows you to claim any credits for which you might be eligible, such as the tax credit for the elderly and disabled or the earned income credit. Filing a return also ensures that you receive any refund you may be owed.
States That Exempt Social Security Benefits
Thirty states exempt all Social Security benefits from taxation:
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming are the states with no income tax at all as of 2021. New Hampshire has a tax, but only on interest and dividends. Social Security income there is exempt.
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How To Reduce Or Defer The Tax You Owe
You may be able to reduce or defer some of the taxes you owe with any of the following:
- Pension income splitting You and your spouse or common-law partner can choose to split your eligible pension or superannuation income.
- Carrying charges and interest expenses You can claim carrying charges and interest you paid to earn income from investments.
- Registered retirement savings plan Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan.
- Excess registered pension plan contributions between 1976 and 1985 You may have made current service contributions exceeding $3,500 in one or more years from 1976 to 1985 and you could not have fully deducted these excess contributions. Call the CRA at 1-800-959-8281 to help you calculate your deduction and claim these amounts.
- Federal deductions, credits, and expenses Non-refundable tax credits, such as the age amount, the pension income amount and the amounts transferred from your spouse or common-law partner, reduce the amount of income tax you owe.
- Provincial or territorial credits You may be able to claim credits that are specific to your province or territory.
Pay Attention To Social Security And Other Income Amounts
If you worked for an employer or had net profits from self-employment before retirement, you’ll receive Social Security benefits in retirement. If during retirement you only have income from Social Security benefits, then you will not include those benefits in your gross income. In this case, your gross income will equal zero, and you won’t have to file a federal income tax return.
If you have income that is not tax-exempt, you may have to pay income taxes in retirement. For tax year 2021, if you are filing jointly with a spouse who is also 65 or older, you will file a return and pay taxes if your income exceeds $27,700 . It’s important to note that these amounts are different from previous tax years, and these amounts will probably increase slightly each year.
If the sum of half your Social Security benefits plus any other income exceeds $25,000 for those filing single or $32,000 for those filing jointly, then you will have to include some of your benefits as taxable income. If you are married but file a separate tax return from your spouse and live with your spouse at any time during the year, then 85% of your Social Security benefits will be taxable income.
If you still have earned income from a part-time job or other sources, you may meet the threshold that requires you to pay taxes on your Social Security benefits during retirement.
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Do I Need To Make Quarterly Estimated Payments
If you have substantial income from investments, taxable retirement plan withdrawals or other sources from which you do not have income tax withheld, you probably need to make quarterly estimated payments to avoid penalties and interest.
However, if your income is low you may owe little to no federal income tax. For instance, if you owe less than $1,000 after you file your taxes, you wont owe a penalty.
If your income was modest in the previous year, the safe harbor rules may also keep you from owing penalties and interest.
If your total income tax withholding and timely estimated tax payments equal at least 90 percent of the tax shown on the current years return, or 100 percent of the tax shown on your previous years tax return, you wont pay a penalty.
If your tax liability last year was zero, you typically dont have to make estimated tax payments throughout the current year.
The easiest way to determine if you will owe more than $1,000 in tax for the year is to use TaxActs Tax Calculator to estimate your taxes.
Taxes Are Critical But Your Overall Retirement Plan Is More Important
Taxes can be a burden, but they are just one of hundreds of expenses we all contend with.
Having a well documented overall retirement plan is probably more important to your overall financial well being than the details of taxes. The NewRetirement Retirement Planner lets you plan for retirement from now till your forever. You can set different levels of income, different levels of expenses, explore using home equity to help fund retirement and so much more.
This Retirement Planner is easy to use and gives you control over hundreds of different levers so you can discover a retirement plan that suits your desired lifestyle and means.
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How To Know If You Need To File Taxes
Because state taxes in Pennsylvania exempt retirees, well focus entirely on federal taxes in this section.
It all comes down to how much money youre receiving. By only having one source of retirement income , its likely that the amount of money youre receiving every year is too low to be taxed. But if youve set up more pension and retirement accounts over the course of your career, its likely that youre bringing in enough funds to be taxed by the federal government.
Lets break it down a little more. Overall, 40% of retirees end up being taxed on their social security. If, as an individual, your combined annual retirement income is at or below $24,999, you wont be taxed on what you receive from social security. After that, any amount between $25,000 and $34,999 means that your social security can be taxed up to 50%. If you have more than $35,000, your social security income can be taxed up to 85%. These numbers change slightly if youre filing taxes jointly with a partner, with a similar three-tier system for determining how much social security is taxed.
If your income falls in any of the taxable amounts above, or if you receive income from pensions or other taxable retirement plans, youll have to include that in your tax forms. So, as tax season gets closer, talk to your accountant about where you stand and what you need to do to prepare for April 15.
Retirement Planning And Your Taxes: Big List Of Tips For Keeping More Of Your Own Money
Not even retirement taxes are completely certain right now. The Federal tax payment deadline has been moved to July 15. And, it was just announced that taxpayers can also wait to file returns.
Treasury Secretary Steven Mnuchin tweeted, all taxpayers and businesses will have this additional time to file and make payments without interest or penalties. He also encouraged all taxpayers who may have tax refunds coming to file now to get your money,
This deadline extension is for federal returns. Double-check your states tax deadlines to see if there are any delays.
Either way, Here is a BIG list of tips for keeping more of your money.
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Should I File A Tax Return Even If Im Not Technically Required To
There are some cases where its advisable to file a tax return anyway, even if you could legally decline.
First, if you had federal income tax withheld from your pay, or if you made estimated tax payments, you should file in order to get any surplus withholding refunded back to you.
Second, there are a few tax that can give you a refund even if you didnt make enough income to file. These are called refundable credits. Nonrefundable credits can only apply against taxes you owe.
- Earned Income Tax Credit You could qualify for the EIC if you worked a low-income job. Your credit amount will depend on income level, filing status and how many dependents you claim.
- Child Tax Credit If you have a qualifying child, the full Child Tax Credit is now refundable.
- Additional Child Tax Credit This credit could be available if you have at least one qualifying child and you didnt receive the full amount from the Child Tax Credit.
- American Opportunity Credit Students in their first four years of postsecondary education could qualify for this credit, up to $1,000 of which is refundable.
With these credits, you have to file in order to receive the benefit.
When You Claim Matters
If you claim your Social Security benefits before your FRA, or full retirement age , you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your FRA.1
There will also be an earnings test until you reach that FRA: If you have earned income in excess of $19,560 in 2022, your benefits will be reduced by $1 for every $2 of earned income over the limit.
In the year of reaching your FRA, the earnings test limit is $51,960 in 2022, and your benefits will be reduced by $1 for every $3 of earned income over the limit.
These benefits are not truly “lost,” however. If your benefits have been reduced due to earning, your monthly Social Security check will be increased after your FRA to account for benefits withheld earlier due to excess earnings. Note that “earned” income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earnedbecause they’re all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of “unearned” income.
Once you reach your FRA, there is no earnings test and no benefit reductions based on earned income.
Scenarios: Claiming Social Security at 62 while working
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Know When You Have To File A Tax Return
Many retirees should continue to file an annual tax return with the Internal Revenue Service , but not all are required to do this. Typically, your annual income level determines whether you need to file a tax return.
For instance, if you’re an unmarried individual who’s 65 or older, for tax year 2020 purposes, you only need to file a tax return if your gross income exceeded $12,400. If you’re married and you file jointly for tax year, you only have to file a return if your combined gross income exceeded $24,800. Since these filing rules are geared toward retirees, keep in mind that the income thresholds for joint returns change if your spouse is under 65.
In addition, even if your income level doesn’t require you to file a tax return, you may want to do so anyway. You stand to benefit from filing if any of the following situations apply:
What If I Have Not Completed A Tax Return Previously
We explain the deadline by which you need to notify HMRC if you think you need to complete a tax return and you are not already within Self Assessment in the tax basics section.
We also explain the deadlines for submission of tax returns and the special rules that apply according to the date when HMRC issue you with a tax return.
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You Will Probably Continue To File Taxes With A 1040 And
Most people file their taxes by using Form 1040. For most retirees, this will stay the same after you retire. The main difference is that you attach Form SSA-1099 to report Social Security benefits. And, if you have a pension, you will use Form 1099-R.
You will also need to report work income, annuities and savings withdrawals.
Senior Tax Credits For Elderly Or Disabled Taxpayers
Even though you may have to file a income tax return, there are a couple ways you can lower the amount of tax you have to pay. Are you 65 or older and have other income than just Social Security? Its quite possible that the Senior tax credit for the elderly or disabled could reduce the amount of tax your have to pay on your combined income. Although, you cannot use this credit if you dont owe any money to the IRS. Its only useful when you owe money.
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Lets State The Obvious Taxes Are A Big Budget Item
The average American pays about $10,500 a year in total income taxes federal, state and local. Of course, many households pay a lot more and some people pay nothing at all depending on your income level.
Ten thousand dollars is a big chunk about 14% of the average budget. So, if you think about it, taxes can be a bigger lever in your budget than investment returns, cutting expenses or waiting to claim Social Security for a bigger benefit check.
As such, it is worth worrying about your tax bill in retirement. However, taxes ARE lower for people who are older. According to the Bureau of Labor Statistics, the average tax bill by age is:
- $16,339 for people ages 45-54
- $12,660 for those 55-64
- $5,871 for people 65-74
- Only $1,432 for people over 75
Taxes fall as you get older primarily because most retirees have less taxable income. And, there is a lot retirees can do to manipulate their income to optimize for taxes.