Considerations When Filing as a Retieree

Often, retirees are those who worked hard during their lives and look forward to retirement during their golden years. Today, people live longer and are healthier, and therefore enjoy longer and more active retirements. Toward the end of their careers, retirees may have looked forward to retirement as a time when life would become less complicated. However, for income tax purposes, life as a retiree may be more complicated than life in the workforce.

Provisional Income

Retirees earning social security benefits should examine their provisional income to determine if they have a tax liability for social security benefits. Some social security recipients may be exempt from paying federal income tax; others must pay taxes on up to 50 or 85% of their benefits. To start, retirees need to calculate provisional income. Here is a five-step process to make this calculation:

Step 1 Determine gross income, which is the total amount of money earned.

Step 2 Add any interest, dividend, or bond receipts that are tax exempt. For instance, a taxpayer who earns $1,000 in interest on a mutual fund would add this to his or her adjusted gross income.

Step 3 Multiply social security benefits by 50% and add the sum to your previous total. For example, if social security benefits are $18,000, then multiply it by 0.5 to get $9,000.

Step 4 Determine your tax liability from the overall total. If your provisional income is less than $25,000 for single head-of-household returns or $32,000 for joint returns, then your social security benefits will not be taxed.

Step 5 If your provisional income is $25,000 or less for a single head-of-household return or between $32,000 and $44,000 for joint returns, then up to 50% of your benefits will become taxable. Above $44,000 would be 85% taxable.

To illustrate, Mike and Suzie are both sixty-nine years old and retired. They file their taxes jointly. Mike works a part-time job where he earns $9,000 per year. They receive $9,000 annually in taxable interest and dividends from investments and $15,000 from municipal bond tax-exempt interest. They also receive a combined $19,000 from social security benefits. Their provisional income is $43,000, which exceeds the $32,000 threshold, so 50% of their social security benefits, or $9,500, will be taxable income.

Credit for the Elderly or Disabled

A retired taxpayer may be eligible for the Credit for the Elderly or the Disabled. Like any other tax credit, it is a dollar-for-dollar reduction of your tax bill. The maximum credit available to a taxpayer is $1,125.

A retired taxpayer can take the credit, provided he or she meets the following criteria:

  1. The taxpayer is a qualified individual, meaning that the taxpayer is retired and age 65 or older or is retired on permanent and total disability; and
  2. The taxpayer's adjusted gross income does not exceed $12,500 for a single filer and $25,000 for those married filing jointly; and
  3. The taxpayer's non-taxable income from social security or other non-taxable pension does not exceed $3,750 if a single filer or $7,500 for those married filing jointly.

Retirees worked toward receiving their social security benefits, yet those benefits may be taxable. What's more, calculating tax on those benefits is complicated. Retirees may also be eligible for a tax credit. Each individual retiree's income level will determine tax liability.

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