What Seniors Should Know About Their Taxes

COVID-19 has changed many aspects of our lives–including the way we file taxes. This year’s deadline for filing federal income taxes is May 17. For older adults, benefits like additional senior tax deductions have been added.

Filing for an Extension

The IRS provides tax information specifically for seniors. Topics covered include:

• Social Security and Railroad Retirement Benefits
• Individual Retirement Arrangements (IRAs)
• A Tax Guide for Retirees
• Tax Filing Information
• Credits and Senior Tax Deductions
• Reporting Income

There is also information on how to apply for an extension until Oct. 15, and links to the required forms.

According to the IRS, there are requirements for filing an extension:

• An extension of time to file your return does not grant you any extension of time to pay your taxes.
• You should estimate and pay any owed taxes by your regular deadline to help avoid possible penalties.
• You must file your extension request no later than the regular due date of your return.

Economic Impact Payments

Economic Impact Payments are, technically, a tax credit. The IRS does not add the amount to your income. The payments will not increase your tax bill or reduce your tax refund.

The latest round of Economic Impact Payments, in accordance with American Rescue Plan 2021, are being sent throughout May 2021.

If you did not receive a first and second Economic Impact Payment, or received less than the full amount, you may be able to claim the 2020 Recovery Rebate Credit.

Larger Standard Deductions

According to AARP, standard deductions are much better this year, regardless of your age.

The standard deductions for the 2020 tax year is $12,400 for individuals and $24,800 for married couples filing jointly. This is an increase over the 2019 tax year. If you are filing as a head of household (a filing status for single or unmarried taxpayers who have maintained a home for a qualifying person, such as a child or relative), the deduction has increased to $18,650.

The standard senior tax deductions, however, are even better. Married taxpayers born before Jan. 2, 1956–, whether filing jointly or separately–, get an extra $1,300 apiece added to their standard deductions. The additional standard deduction is $1,650 for singles and heads of households.

You are also eligible for these same standard senior tax deduction amounts if you are younger than 65 and blind. If you are over 65 and blind, the amounts double.

There is a special tax return for those 65 and above that makes calculating the standard deduction much easier. — Form 1040-SR, “U.S. Tax Return for Seniors.”

For this to be effective, your eligible medical expense deductions need to add up to more than the standard deduction. And you deduct only medical expenses that are above a specified threshold of your adjusted gross income (AGI). Due to the pandemic, that number is 7.5 percent, rather than the previous 10 percent.

Among the available senior tax deductions are:

• Out-of-pocket fees to doctors and dentists
• Costs of nursing home care, provided that medical services are the main reason for being in the nursing home

• Acupuncture sessions
• Smoking cessation programs
• False teeth
• Some insurance premiums

A Higher Tax Filing Threshold

If you are 65 or older, you may not even have to file a tax return, if the filing threshold equals the standard deduction you are entitled to claim. (See above, under Larger Standard Deductions).

Most single taxpayers must file tax returns when their earnings reach $12,400 in the 2020 tax year, but you can earn up to $14,500 if you are age 65 or older. You can jointly earn up to $26,100 if you or your spouse is 65 or older and file a joint return. If you are both 65 and older, you can earn up to $27,400.

Taxable Social Security Income

Whether or not your Social Security income is taxable depends on your overall earnings.

Add up all your income from sources other than Social Security and what would normally be tax-exempt interest. Then add half of what you collected in Social Security benefits during the course of the tax year to that total. (The Social Security Administration should have sent you Form SSA-1099 around the first of the year, showing how much you received)

None of your Social Security income is taxable if the total of all your other income and half your Social Security is less than $25,000, and you are a single head of household or a qualifying widow or widower.

This increases to $32,000 if you’re married and filing a joint return, and drops to $0 if you file a separate return after living with a spouse at any point during the tax year.

Credit for the Elderly and Disabled

There is a significant tax break available to older adults called the Tax Credit for the Elderly or Disabled. This credit can remove some, if not all, of your tax liability if you end up owing the IRS.

Depending upon your ability to meet income thresholds and other requirements, the amount credit ranges from $3,750 to $7,500. This is called Schedule R: The Tax Credit for the Elderly or the Disabled.

IRA Contributions

You have until May 17 to make contributions to a traditional IRA for the 2020 tax year. The contribution would reduce your taxable income. People who are 50 and older can contribute up to $7,000. You can only contribute earned income to an IRA. Social Security payments, pension payouts, dividends and other types of income don’t count.

If you or your spouse is covered by a workplace retirement plan such as a 401(k), you can deduct the full amount of your contribution. The deduction faces limits if you or your spouse is covered by a retirement plan at work, or if your Modified Adjusted Gross Income (MAGI) exceeds certain levels.

There is now no age limit on making contributions to a traditional IRA.

Health Savings Accounts (HSAs)

You have until May 17 to make an HSA contribution for the 2020 tax year. The maximum annual contribution is $3,550 for yourself, or $7,100 for families. If you are 55 or older, you can add another $1,000.

You need to be insured by a High-Deductible Health Plan (HDHP) to make a contribution. To qualify as an HDHP for 2020, the plan must have a minimum annual deductible of $1,400 for individuals and $2,800 for families. It also must have an out-of-pocket maximum of $6,900 for individuals and $13,800 for families.

Long-Term Care Expenses

If you are close to overcoming your standard deductions, don’t forget to deduct the premiums you pay for long-term care insurance. This is a medical expense deduction, which means you can only deduct the amount of your qualifying medical expenses that exceed 7.5 percent of your Adjusted Gross Income.

The IRS does allow you to deduct an increasing amount of those premiums as you get older.

Taxes are just one aspect of proper financial planning for seniors. To get help creating your financial plan, visit our blog.