Boomers have spent decades (in theory) building their nest eggs, and when it finally comes time to start drawing from retirement portfolios, the wrong tax strategy can drain the income faster than expected—tarnishing their “golden years.”
Experts say claiming all their eligible tax deductions is the best way for boomers to ensure their retirement years are spent enjoying the good life instead of being pinched by Uncle Sam.
With tax season in full swing, I spoke with Certified Public Accountant Jordan Niefeld at Gerstle, Rosen & Goldenberg, who offered the following tax tips to help boomers protect their nest egg. Here’s what he had to say:
Boomer: Is there a tax advantage for baby boomers that do not itemize their deductions?
Niefeld: Seniors who do not itemize their deductions will be eligible for a higher standard deduction amount if the senior and/or spouse are 65 years old or older. The standard deduction for a married filing jointly couple is $12,200 in 2013. Add an additional $1,200 if you are over the age 65. You can get an even higher standard deduction amount if either you or your spouse is blind.
Boomer: What tax credits are available for elderly or disabled seniors?
Niefeld: Some seniors may be eligible to receive the Elderly and Disabled Tax credit. You must use Form 1040 or Form 1040 to receive the credit (Form 1040EZ is disallowed). The credit is based on your age, filing status and income. You may be able to take the credit if the senior meets two criteria:
1) the senior or their spouse are either 65 years or older; or under age 65 years old and are permanently and totally disabled and
2) the senior’s income on Form 1040 line 38 is less than $17,500; $20,000 (married filing jointly and only one spouse qualifies); $25,000 (married filing jointly and both qualify); or $12,500 (married filing separately and lived apart from your spouse for the entire year).
Keep in mind the non-taxable part the senior’s Social Security or other nontaxable pensions, annuities or disability income must be less than $5,000 (single, head of household, or qualifying widow/er with dependent child); $5,000 (married filing jointly and only one spouse qualifies); $7,500 (married filing jointly and both qualify); or $3,750 (married filing separately and lived apart from your spouse the entire year).
Boomer: Are there programs that seniors and current retirees can take advantage to get tax assistance?
Niefeld: Many seniors and current retirees don’t know that they can take advantage of many IRS-sponsored volunteer tax assistance programs which offer free tax help to seniors and low to moderate-income filers who cannot prepare their own tax returns.
For example, the VITA Program generally offers free tax help to people who make $52,000 or less and need assistance preparing their tax returns. IRS-certified volunteers provide free basic income tax return preparation with electronic filing to qualified individuals in local communities. The volunteers can inform taxpayers about special tax credits they may qualify for such as the Earned Income Credit, Child Tax Credit and the Credit for the Elderly or the Disabled. VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations.
Seniors may also get assistance through the TCE Program. This program offers free tax help to people who are 60 or older and the assistance specializes in questions about pensions and retirement issues that are unique to seniors. IRS-certified volunteers who provide tax counseling are often retired individuals associated with non-profit organizations that receive grants from the IRS.
It is important that all seniors bring several important financial documents to their local VITA or TCE site including:
- Proof of identification Picture ID
- Social Security Cards for you, your spouse and dependents or Social Security Number verification letter issued by the Social Security Administration or Individual Taxpayer Identification Number (ITIN) assignment letter for you, your spouse and dependents
- Wage and earning statement(s) Form W-2, W-2G, 1099-R, 1099-Misc from all employers
- Interest and dividend statements from banks (Forms 1099)
Boomer: Are Social Security benefits taxable?
Niefeld: Many seniors are surprised to learn that some of their Social Security benefits could be taxable. In general, if part of your Social Security benefits are taxable, how much is taxed depends on the amount of your benefits plus other income. As a general rule, the more income you have, the more likely that some portion of your Social Security benefits will be taxed.
Boomer: Are there tax breaks for boomers who take care of their grandchildren or other dependents on a full-time basis?
Niefeld: There is a tax break some seniors may be able to take full advantage if they take care of grandchildren and other dependents. In today’s economic climate, it's not uncommon to see families living together as bigger units, with the grandparents paying the large majority share of household expenses. When seniors are supporting the family, they may be entitled to claim some of members as dependents, even if one or more of them is not their child.
Boomer: What taxes and penalties are associated with withdrawing retirement savings?
Niefeld: New retirees often learn a difficult lesson when they face taxes and penalties when they start withdrawing their retirement savings. Having a tax savvy withdrawal strategy is critical for not just new retirees, but and seniors on all levels. An example of this is when people don’t know about the penalties enforced on early IRA withdrawals. If you are under the age of 59 ½ and withdrawal funds from your own account, you will be subject to a 10% penalty.
Another common withdrawal mistake is taking a large individual retirement account distribution to pay off debt, such as a mortgage or home equity loan. If someone withdraws $50,000 or $75,000 to pay off their mortgage, you have to pay taxes like you earned it. Depending on where you land in the tax bracket, taxes due could amount to as much as one-third of the total withdrawal. Instead, seniors should strategize with their tax professional and consider stretching out larger withdrawals over three or more years to reduce the overall tax burden.