The Senior Citizens League, conducted a January survey revealing that 57% of older taxpayers are concerned about paying higher tax this year due to the 5.9% Social Security cost-of-living adjustment in 2022. Managing taxes can become more complex for individuals over 65 due to several factors such as having multiple income sources, working part-time, and dealing with mandatory minimum distributions from retirement accounts.
According a certified financial planner it is not uncommon for seniors to earn more income in their later years than they did when they were employed. As an older adult, there are several things to consider this tax season. Managing IRMAA surcharges can be challenging because they function as a cliff rather than a gradual increase. Jastrem explains that exceeding an income tier by even $1 can result in the full surcharge being applied.
The Importance of Medicare Thresholds for the tax
The income-related monthly adjustment amount (IRMAA) can impact your Medicare Part B and Part D premiums in the future, depending on your income. Medicare premiums are determined based on your tax return from two years prior, and if your income surpasses specific thresholds, you may have to pay higher premiums.
Starting from 2023, individuals filing taxes independently with a modified adjusted gross income exceeding $97,000 in 2021, or those filing jointly with over $194,000, will have to pay increased monthly Medicare premiums. According to O’Neill, managing your tax bracket becomes critical during the later years of your life.
Charitable Donations Can Be Made with Required Distributions
Upon reaching the age of 73, the IRS mandates that individuals must take required minimum distributions from tax-deferred retirement accounts. However, starting at age 70 1/2, you have the option to send some or all of your required minimum distributions directly to a charity of your choosing. This will satisfy the required minimum distribution, but the amount will not be included in your taxable income.
According to Ian Weinberg, a certified financial planner in Woodbury, New York, taking a regular required minimum distribution (RMD) from your IRA can increase your adjusted gross income and push you into a higher tax bracket.
To avoid this situation, you can make a qualified charitable distribution by directly sending up to $100,000 of your annual required minimum distribution to a charity.
Tax Approach Changes for Individuals with Side Businesses
A January survey from AARP found that approximately 25% of adults aged 50 and above engage in gig work or freelancing. If you’re involved in gig work, your earnings are considered business income, making you eligible to deduct business expenses, such as health insurance premiums if you’re paying for your insurance. According to O’Neill, self-employed individuals who are on Medicare can also deduct Medicare premiums for themselves and their spouses against business income.
Moreover, other deductible expenses may include business supplies, home office expenses, and advertising costs, which can also cover expenses incurred to maintain a website.
Social Security Benefits May Be Subject to Taxation
It may come as a surprise to many, but Social Security benefits can be subject to taxation if your income meets certain thresholds. Certified financial planner, Nadine Burns, from Ann Arbor, Michigan, highlights this common misconception.
The amount of Social Security benefits subject to taxation is determined by your combined income, which comprises your adjusted gross income, nontaxable interest, and half of your Social Security benefits. If you file taxes as an individual, and your combined income is over $25,000 or over $32,000 if you’re filing a joint return, you may be liable to pay income tax on 50% to 85% of your benefits.
Availability of State Tax Breaks
It’s worth researching whether your state provides tax deductions or credits for retirees. Additionally, there is a separate deduction for individuals over age 65. Retirees in Ohio may qualify for credits depending on their retirement income or age, with a senior citizen credit available for taxpayers who were 65 or older during the tax year. In Colorado, residents aged 65 and above who meet specific income requirements can receive an income tax credit of up to $1,000. It’s worth checking with your state tax department to see what tax breaks may be available for retirees in your state.