None of us can escape tax season, not even when we get older. Those over 65 have various tax considerations that come into play with regard to Social Security income, age-related deductions and credits, IRA distributions, medical expense deductions, and more. Below is some general information for older adults and their families to consider for this tax season.
Tax situations vary, so don’t construe the following as tax advice. Always follow up with your tax professional to see if these situations apply to your personal tax situation.
Taxpayers get a larger standard deduction starting in the calendar year during which they turn 65. For those younger than 65, the 2017 standard deductions are: $6,350 (single or married filing separately); $9,350 (head of household); and $12,700 (married filing jointly).
When filers reach the age of 65, the standard deduction increases by $1,550 if they are single or head of household. Married filers in the plus-65 range add $1,250 to their standard deduction. There is also an additional standard deduction of $1,250 for those who are legally blind, defined as someone who wears corrective glasses but whose vision is 20/200 or less in his or her best eye, or has no eyesight at all.
Standard deductions are for those whose itemized deductions don’t exceed the amounts listed above. Only 30 percent of households currently itemize (that figure is expected to go down significantly next year when higher standard deductions take effect). Those who itemize typically are in higher-income households. However, if your parents can deduct mortgage interest, property taxes, charitable donations, medical expenditures, and other expenditures in excess of the standard deduction, then itemizing will save them money.
Credit for the Elderly or Disabled
You must file Form 1040 or Form 1040A to receive this credit, which is based on age, filing status and income. The credit is available to individuals and/or their spouses who are either 65 years of age or older or under 65 but permanently and totally disabled. Those individuals qualify if:
- Their adjusted gross income is less than $17,500 (individual), $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 living apart from your spouse for the entire year), and
- The non-taxable part of their Social Security or other nontaxable pensions, annuities or disability income is 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).
You can figure the credit by using Schedule R from Form 1040 or 1040A.
Social Security Income
Whether Social Security income is taxable depends upon income your parent may have earned from other sources such as pensions and IRAs. If other sources of income and half your parent’s Social Security is less than $25,000 (single tax filer) or $32,000 (married, filing joint return), the Social Security income is not taxable. If income exceeds those levels, up to 85 percent of your parent’s Social Security income may be subject to tax.
If your parents sold their home last year, gather the paperwork to see how much profit they made on the sale. If they owned and lived in the home for at least two of the past five years prior to selling it, they have no tax liability for a profit of up to $250,000 as a single filer or $500,000 for a married couple.
Your parents can use this tax exclusion even if they used it previously, provided that they haven’t used it for another home sale in the last two years. If their profit exceeds the $250,000 or $500,000 limit, report that amount as a capital gain on Schedule D.
Starting in the year they turn 70-1/2, taxpayers are subject to a Required Minimum Distribution (RMD) for their traditional, rollover, SEP, or Simple IRAs. The distribution must be taken by April 1 of the following year.
The IRS provides a worksheet to figure the RMD, based on the filer’s age and a corresponding distribution period tied to life expectancy. For instance, at age 75, the distribution period is listed as 22.9 years. If your parent has $100,000 in a traditional IRA, divide 100,000 by 22.9 to determine an RMD of $4,366.82. Determine a separate RMD for each of your parent’s IRAs, total these minimum amounts, and the take the distribution for any one or more of these accounts.
An exception to the above is if the filer’s spouse is the sole beneficiary of the IRA and he or she is more than 10 years younger than the taxpayer, in which case a different life expectancy chart is used. There is no RMD for Roth IRAs, since those vehicles are not subject to additional tax.
Your parent can take out more than the RMD each tax year, but it’s a good idea to do financial planning and retirement calculations to ensure that money lasts throughout retirement.
Medical and Dental Expenses
Those who itemize their tax deductions are able to deduct medical and dental expenses exceeding 10 percent of their adjusted gross income. (Note: This is a hike from the previous tax year, in which those 65 years of age and older were able to deduct expenditures above 7.5 percent). So, if your parent’s income in 2017 was $50,000 and medical and dental expenditures topped $5,0000, anything in excess of that $5,000 figure would be deductible. This includes, among other expenses, fees for medication, hearing aids, therapy, nursing services, nursing homes, long-term care, and some assisted living fees.
In some cases, health insurance, dental insurance, and long-term care insurance premiums may be included in that 10-perent figure. In addition, Medicare premiums may be deductible as a medical expenditure as well. Check with your tax advisor or Social Security Administration for details.
Big Changes Next Year
The information provided here is for the 2017 tax year. The newly passed tax reform bill is currently in effective, meaning you can expect many changes for the 2018 tax year when filing your taxes in 2019.
CHIME IN: What experiences have you had in helping your older parents with their taxes?