There are certain tax situations that may apply to you as an older taxpayer. It is important to understand the way the tax law affects your return to ensure you pay the least amount of tax. Learn more about the following to prepare for an advantageous tax return:
- Filing Requirements
- The Standard Deduction
- Retirement Plans and IRAs
- Lump-Sum Distributions
- Tax Credits
- Social Security Benefits
- Life Insurance Proceeds
Contact your neighborhood Jackson Hewitt office for more information or for assistance.
You must first determine if you are required to file a tax return. Generally, you must file a return for 2014 if your gross income is equal to or greater than the following amounts for your filing status:
- Single: $10,300
- Head of Household: $13,250
- Married Filing Jointly: $20,600
- Qualifying Widow(er) with Dependent Child: $16,600
- Married Filing Separately: $4,000
However, if you are age 65 or older, the amounts are:
- Single: $11,850
- Head of Household: $14,800
- Married Filing Jointly: $21,850 if one spouse is age 65 or older, $23,100 if both spouses are age 65 or older
- Qualifying Widow(er): $17,850
- Married Filing Separately: $4,000
When determining your gross income, include all taxable income. You do not include Social Security benefits unless you are Married Filing Separately and you lived with your spouse at any time during the year. When determining if you qualify to use the amounts for taxpayers age 65 and older, note that you are considered to be age 65 the day prior to your actual birthday. Taxpayers born on January 1, 1951 are considered age 65 on December 31, 2015.
The Standard Deduction
Your standard deduction is determined by your filing status, age, and vision. Generally, the standard deductions for 2015 are:
- Single: $6,300
- Head of Household: $9,250
- Married Filing Jointly or Qualifying Widow(er): $12,600
- Married Filing Separately: $0 or $6,300 if neither taxpayer is itemizing deductions
However, if you are age 65 or older or blind and your filing status is Single or Head of Household, add an extra $1,550 (for age or for blindness) to your standard deduction. If you are age 65 or older or blind and your filing status is Married Filing Jointly, Married Filing Separately, or Qualifying Widow(er), add an extra $1,250 (for age or for blindness) for each qualifying taxpayer to your standard deduction.
When determining if you qualify for the additional amounts for taxpayers age 65 and older, note that you are considered to be age 65 the day prior to your actual birthday. Taxpayers born on January 1, 1951 are considered age 65 on December 31, 2015.
Retirement Plans and IRAs
Generally, after age 59 and one half, you are able to take distributions from your retirement plan and your IRA without any penalty. Many pension plans allow you the option to receive all the funds in one lump-sum or roll over all or part of the funds into an IRA. If you roll over your pension into an IRA, you will have the ability to control your own investments and to control how much money you want to withdraw and when.
As long as you are working, you may contribute to a pension plan. You cannot contribute to your traditional IRA once you reach age 70 and one half, even if you are still working. You may continue to make contributions to a Roth IRA as long as you are working.
Generally, the most that can be contributed to any type of IRA in 2015 is $5,500. However, if you are age 50 or older, you can contribute up to $6,500. Your contribution cannot be more than your taxable compensation.
Distributions from pension plans are generally required when you retire or upon reaching age 70 and one half, whichever is later. Traditional IRA distributions must begin at age 70 and one half. There are no required distributions for Roth IRAs.
The distribution is based on the value of your plan (either the individual pension plan or all traditional IRAs combined) and life expectancy.
You may be able to elect an optional method of calculating the tax on lump-sum distributions received from qualified retirement plans. If the plan participant was born before January 2, 1936 and you received the entire plan balance in one year, you may qualify for the 10-year tax option. This option generally will result in a lower tax on the distribution.
You may be eligible for the following tax credits:
Credit for Dependent Care Expenses
If you or your spouse are unable to care for yourself and outside care is needed while the other spouse is working, you may qualify for a tax credit. The credit is based on a percentage of the amount you pay for care. The maximum credit for the care of one qualified person is $1,050. The maximum for two or more qualifying persons is $2,100.
Credit for the Elderly or the Disabled
If you were age 65 or older at the end of the tax year, or if you were under age 65 but retired on permanent and total disability and received taxable disability income, you may qualify for this credit. Your adjusted gross income must be less than $17,500 ($25,000 if Married Filing Jointly and both spouses qualify, $20,000 if Married Filing Jointly and only one spouse qualifies, or $12,500 if filing Married Filing Separately and you lived apart from your spouse for the entire year). Also, your nontaxable Social Security benefits and other nontaxable pensions must be less than $5,000 ($7,500 if Married Filing Jointly and both you and your spouse qualify, $5,000 if Married Filing Jointly and only one spouse qualifies, or $3,750 if filing Married Filing Separately and you lived apart from your spouse for the entire year). If you are Married Filing Separately and lived with your spouse at any time during the year, you cannot take this credit.
Social Security Benefits
If the total of half of your Social Security benefits plus all your other income, including tax-exempt interest, is more than the base amount for your filing status, some of your Social Security benefits may be taxable. Your base amount is:
- $25,000 if you are Single, Head of Household, Qualifying Widow(er) with Dependent Child, or Married Filing Separately and did not live with your spouse at any time during the year
- $32,000 if you are Married Filing Jointly
- $0 if you are Married Filing Separately and lived with your spouse at any time during the year
- If you are Married Filing Jointly, you and your spouse must combine your incomes and your Social Security benefits to determine whether any of your combined benefits are taxable. Even if one of you did not receive any benefits, you must add your incomes together to determine whether any of the benefits received by you or your spouse are taxable.
The IRS provides a worksheet to use to calculate the taxable amount of your Social Security benefits.
Unlimited earnings from employment are allowed for those who reach the defined Social Security full retirement age without reducing the amount of Social Security benefits received. This does not impact your income tax return directly except that you may receive more income and therefore have more taxable Social Security benefits.
Life Insurance Proceeds
Life insurance proceeds paid to you as a named beneficiary are not taxable. Any earnings from the investment of the proceeds are taxable. Any payments made to you as the beneficiary of a decedent's employer retirement plan or an IRA are taxable income to you, but the 10% additional tax for early withdrawal is not imposed.