When you retire or reach a certain age, there might be certain things you no longer have to do. You might get to skip the commute or qualify for some great discounts. But no matter your age, you don’t get to opt out of taxes. It’s important to understand why seniors are still taxed, the common taxes seniors pay and how to minimize your tax bill.If you want individualized help preparing for retirement or creating a tax strategy, you can bring on a financial advisor.
At What Age Can You Stop Filing Taxes?
Taxes aren’t determined by age, so you will never age out of paying taxes. Basically, if you’re 65 or older, you have to file a tax return in 2022 if your gross income is $14,700 or higher. If you’re married filing jointly and both 65 or older, that amount is $28,700. If you’re married filing jointly and only one of you is 65 or older, that amount is $27,300.
That said, there is one situation in which you can kiss taxes goodbye. If your only income is Social Security payments, you won’t owe taxes and you probably won’t need to file a tax return.
Common Taxes Seniors Pay
If you’re 65 or older, you might also be retired or partially retired and taking distributions from your retirement savings. Retirement savings and investments can have more complex tax rules than income, where you often get taxes deducted automatically from each paycheck and a W-2 at the end of each year. Here are some of the more common taxes retirees face and how they work.
Social Security Taxes
If you have significant retirement income other than Social Security, you might have to pay income tax on your Social Security benefits. The percentage of your Social Security benefits that are taxable depends on your combined income. Combined income is defined as your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.
If you file taxes singly and your combined income is $25,000-$34,000, you may owe income taxes on 50% of your Social Security benefits. If your combined income is higher than $34,000, up to 85% of your benefits may be taxed.
If you file a joint return and you and your partner’s combined income is $32,000-$44,000, you may owe income taxes on 50% of your Social Security benefits. If that number is more than $44,000, 85% of your benefits may be taxed.
Common Retirement Accounts
IRAs, 401(k) plans and other popular retirement savings vehicles have different tax treatments. Generally speaking, some are pre-taxed and some are taxed at withdrawal. For example, IRAs that are funded by money that was already taxed—say you take $1,000 from a paycheck and put it in a Roth IRA—won’t be taxed when you withdraw that money in retirement as long as you meet IRS requirements.
On the other hand, 401(k) plans are usually funded with pre-tax money, so you’ll usually owe income tax on withdrawals in the year that you take them.
Pension Taxes
Like 401(k) plans, pensions are usually funded by pre-tax money, so you’ll owe federal income taxes on withdrawals in the year you take them. If you take a lump-sum payment rather than annual or periodic payments, you will owe the total tax bill in the year you receive that payment.
In many cases, your employer through which you have the pension will withhold taxes as your pension payments are disbursed, which can help mitigate the tax bill.
How to Minimize Taxes as a Senior
While seniors don’t get to dodge taxes altogether, there are several ways for you to save on your taxes once you reach a certain age. Here are a few.
- Take advantage of the tax credit for the elderly: The Credit for the Elderly and Disabled is worth between $3,750 and $7,500. You can use the IRS’s tool to see if you qualify and how large a credit you might get. Generally speaking, you have to be 65 or older and make less than $17,500 in adjusted gross income if you’re filing singly or as head of household—that limit rises to $20,000 if you’re married filing jointly and only one spouse is 65 or older and $25,000 if you’re married filing jointly and both 65 or older.
- Use your bigger standard deduction: If you’re 65 or older and you don’t itemize deductions, you are entitled to a higher standard deduction. A single filer over 65 gets an extra $1,750 deduction, a couple filing jointly gets an extra $1,400 for each partner who is 65 or older. So if only one spouse is 65 or older, the extra deduction amount is $1,400, but if both are 65 or older, it’s $2,800.
- People 50 or older can make “catch-up” contributions to their retirement accounts: The 2023 contribution limit for a traditional or Roth IRA is $6,500, up from $6,000 in 2022, but if you’re 50 or older you get an extra $1,000. The 2023 contribution limit for a 401(k) plan is $22,500, up from $20,500 in 2022 and those 50 and older get an extra $7,500, up from $6,500 in 2022. Contributing to a tax-deferred retirement account reduces the amount of income tax you owe—and sets you up for a more secure retirement.
- You’re not alone:If navigating tax credits or understanding changing catch-up limits feels overwhelming, you don’t have to go it alone. Take advantage of free IRS tax assistance for those 60 and older or free AARP tax assistance for those 50 and older who have a low or moderate income.
The Bottom Line
Unless you have no income outside of Social Security payments, you’ll probably have to keep filing taxes. The good news is that there are tax credits and other strategies you can use to help you keep that tax bill low. You may want to work with a financial advisor in order to make sure you have a clear tax strategy during retirement.
Tips for Saving on Taxes in Retirement
- A financial advisor can help you build a retirement income plan. Finding a financial advisor doesn’t have to be hard.SmartAsset’s free tool will match you with up to three vetted financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to create a comprehensive retirement plan, get started now.
- Use SmartAsset’s retirement calculator to make sure your retirement savings will carry you through—or learn how you need to adjust your saving strategy to make your plan work.
- Taxes aren’t the only surprise expense in retirement—be sure to account for your Medicare costs as you plan out your retirement income too. Check out SmartAsset’s guide to Medicare Part A, Part B, Part C and Part D.
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I'm an expert in personal finance and taxation, with extensive knowledge in retirement planning and tax strategies for seniors. My expertise is based on a combination of academic background, professional experience, and a genuine passion for helping individuals navigate the complexities of their financial lives.
In the provided article, the focus is on taxes in retirement, specifically for seniors. Let's break down the key concepts and provide additional insights:
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Age and Tax Filings: The article emphasizes that taxes are not determined by age alone. Seniors, defined as individuals aged 65 or older, still need to file tax returns. The income thresholds for filing are mentioned: $14,700 for single seniors, $28,700 for married filing jointly with both spouses 65 or older, and $27,300 for married filing jointly with only one spouse 65 or older.
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Social Security Taxes: The article highlights that Social Security benefits may be subject to income tax. The percentage of benefits taxed depends on combined income, which includes adjusted gross income, nontaxable interest, and half of Social Security benefits. Specific income ranges are provided for different filing statuses.
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Retirement Accounts: The article discusses the tax treatments of different retirement savings vehicles. It mentions that IRAs (Individual Retirement Accounts) funded with post-tax money, like Roth IRAs, are not taxed upon withdrawal, while 401(k) plans, typically funded with pre-tax money, result in taxable withdrawals.
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Pension Taxes: Similar to 401(k) plans, pensions funded with pre-tax money lead to federal income taxes on withdrawals. Lump-sum payments may incur a total tax bill in the year of receipt, and taxes may be withheld by the pension provider.
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Minimizing Taxes for Seniors: The article provides several strategies for seniors to minimize taxes, including taking advantage of the tax credit for the elderly, utilizing a higher standard deduction for those 65 or older, making catch-up contributions to retirement accounts for those 50 or older, and seeking free tax assistance for seniors.
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Financial Advisor Guidance: The article suggests seeking the assistance of a financial advisor for personalized retirement planning and tax strategies. It emphasizes the importance of having a clear tax strategy during retirement.
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Additional Resources: The article mentions resources like the IRS tax assistance for individuals aged 60 and older and free AARP tax assistance for those 50 and older with low or moderate income.
In summary, the article covers a comprehensive range of topics related to taxes in retirement, providing valuable information for seniors to navigate their financial landscape. If you have specific questions or need personalized advice, consulting with a financial advisor is recommended.
