You'd think that filing taxes would get easier over time but unfortunately for retirees this just isn't the case. In fact, many retirees will face additional hurdles in their tax filing as a result of new sources of income and special deductions. Here we provide some tax filing tips to help retirees overcome the most common difficulties in filing their post-retirement returns.
TUTORIAL: Personal Income Tax Guide

Advantageous Tax Breaks
There are a lot of great tax breaks for seniors so when you are filing your taxes, make sure you apply for every one you qualify for. The following may apply to you:

  • Reduced Capital Gains Tax: For tax years 2011 and 2012, the long-term capital gains tax rate is 15% for taxpayers in the ordinary income tax rate of 25% or higher. If you are in the 10% or 15% ordinary income tax bracket, then your long-term capital gains tax is zero.
  • Sale of Residence/Exchanges: If a married couple has owned and lived in their primary residence for two out of the last five years (ending on the date of sale), they can claim a capital gains exclusion of up to $500,000 ($250,000 if single) on their tax return. (Learn more in Capital Gains Tax Cuts For Middle Income Investors.)
  • Tax-Exempt Interest/Income: Investments in state and local government securities typically provide federal income-tax-exempt interest to the investor.
  • Oil & Gas Investment Deductions: Direct investments in oil and gas partnerships will provide handsome deduction opportunities for the expenses incurred for tangible and intangible drilling costs, allowing the investor a large upfront deduction; typically, the remainder is deductible according to a schedule.
  • Qualified Dividends: Investments in companies that pay dividends that trade on a U.S. stock exchange could qualify for favorable tax treatment if the dividends are qualified. If the investor holds the shares for a 60-day period both before and after the ex-dividend date, they qualify for a 15% tax treatment (or )% if the taxpayer is in the 10% or 15% ordinary income tax bracket).
  • One-Time Transfer from IRAs to HSAs: You're allowed to make a one-time tax-free rollover of funds from an Individual Retirement Account (IRA) to your Health Savings Account (HSA). The contribution must be made in a direct trustee-to-trustee transfer. This type of rollover is not taxable as income or subject to any penalties for early withdrawal from the IRA. The transfer is limited to the maximum HSA contribution for the year in which the transfer is completed, and the amount contributed is not allowed as a deduction on personal income taxes like normal HSA contributions. (Find out about these deductions and how you can use them to lower your tax bill, see Increase Your Tax Refund With Above-The-Line Deductions.)

Realizing Losses
While no one really likes losses in their investment or real estate portfolio, these can be useful in helping to reduce the amount of income tax due. Also, any casualty or theft losses pertaining to your property can provide tax relief. Realizing the following types of losses should be considered in the given tax year to help offset gains or mitigate taxes:

Security Losses (stocks, bonds, mutual funds, etc.) Selling losing security positions can help offset taxable capital gains and qualify the taxpayer for loss carry-forward. (Read Selling Losing Securities For A Tax Advantage.)
Rental Real Estate Losses Non-real estate professionals that pass an "active participation test" as real estate owners suffering from loss can deduct up to a loss allowance of $25,000. (Read Tax Deductions For Rental Property Owners.)
Annuity Losses If an annuity is surrendered for a loss, the annuity owner can claim a loss deduction. (Read Taking The Bite Out Of Annuity Losses.)
Casualty & Theft Losses Owners can claim damages on Form 4684 for damaged, destroyed or stolen property. (Read Deducting Disaster: Casualty And Theft Losses.)

Effective Withdrawal Strategies
When it comes to retirement income, how you withdraw funds during retirement from various savings vehicles can directly impact your taxes. Here are a few pointers to save on taxes:

  • Only take the required minimum distribution (RMD) from your Traditional IRA if possible.
  • Use taxable accounts (individual, joint, trust) for withdrawing retirement funds.
  • Make quarterly tax payments to the IRS to avoid underpayment penalties.
  • Be cautious of taking funds from your pension, 401(k) and annuity accounts as this is typically taxed as ordinary income.
  • Selecting Social Security early or at normal retirement age will likely effect your taxable income in a given year.
  • Direct transfers from your IRA to a qualified charity can help avoid income tax on the IRA distribution - and the withdrawal counts toward satisfying your RMD requirement. (Being generous has never been more (financially) rewarding! See Give To Charity; Slash Your Tax Payment.)

Standard Deduction vs. Itemizing
When you stop working, you'll have to take a serious look at your situation to determine if you should itemize your deductions or simply take the standard deduction. Upon reaching age 65 or older, you'll receive an additional standard deduction allowance (on top of the regular standard deduction amount) if you elect not to itemize your deductions. For 2010, the additional amounts are $1,400 for a single filer and $1,100 for a married or qualifying widow(er) filer. In addition, if you or your spouse is legally blind, you'll each receive another $1,100 allowance ($1,400 for single filer).

Some deductions such as medical expenses, long-term care premiums, mortgage interest, investment and property losses, and charitable contributions might be higher or the same during retirement. Therefore, you might want to continue to itemize your deductions on your federal tax return if your specific deductions exceed the standard deduction limits. (The receipts you cram into your wallet could be replaced with cash come tax season. Check out 10 Most Overlooked Tax Deductions.)

Credit for the Elderly or Disabled
You might be able to reduce your federal income tax by claiming the Credit for the Elderly or Disabled. The primary qualifications include the following:

  • You've reached age 65 or have suffered a permanent and total disability prior to age 65 while collecting taxable disability income.
  • You're a U.S citizen, resident alien or a non-resident alien who is married to a U.S citizen.
  • Your adjusted gross income (AGI) is below $25,000 (married filing jointly) or $17,500 (single filer).

The actual computation of the credit is a pretty simple five-step process. However, it goes beyond the scope of this article and requires the use of an IRS filing status table to determine the starting amount used in the calculation. (Also check out Give Your Taxes Some Credit.)

Taxation of Social Security
While it's nice to have some additional supplemental income during retirement, it's important that you fully understand how earned income and tax-exempt interest can affect your Social Security benefits. If you're married filing jointly and your provisional income exceeds $32,000 ($25,000 for single filers), then a portion of your Social Security benefits will be subject to federal tax.

Provisional income is the total income shown on your return (earnings from a job, interest, dividends, etc.) plus 50% of your net Social Security benefits, plus tax-exempt interest or certain tax-exempt fringe benefits or exclusions.

For example, Jim and Mary are both 68 years old and are retired. They file a joint return. Jim works a part-time job paying $12,000 per year. They have $7,000 in taxable interest/dividends and $15,000 in tax-exempt interest from municipal bonds. Combined, their net Social Security benefits are $18,000. Their provisional income is $43,000. This exceeds the $32,000 limit, so part of their Social Security benefits will be taxable.

To compute the exact amount of your taxable benefits, you should refer to IRS Publication 915. (Find out how to determine whether the tax exemption offered by "munis" benefits you in Weighing The Tax Benefits Of Municipal Securities.)

Avoiding an Audit
While the odds of an actual tax audit are still fairly low, the IRS has increased the number of audits of high-income taxpayers, schedule C filers (business profit or loss), partnerships, corporations, those who use tax shelters and S corporations. Many audits result from errors or omissions in the recording of figures, itemized deductions and other expenses exceeding IRS targets, as well as excessive tax-shelter losses. Double checking your return for errors and avoiding excessive deductions could help avoid most audits. Here are a few record-keeping tips:

  • Create envelopes or a filing system for bills and receipts for each category (such as charitable contributions, medical expenses, home loan mortgage interest, IRA records, 1099s, and so on).
  • Get in the habit of keeping a list of deductible items as they occur.
  • Keep a ledger of expenses to record deductible items.
  • Retain account statements, credit card receipts and canceled checks as permanent records.

The Bottom Line
Filing your taxes during retirement can be just as time consuming as when you were employed, so you'll still need to keep an organized filing system for all of your tax documents to help you better determine whether to itemize your deduction or take the standard return. Preparing for your tax filing can be simple if you work to stay organized throughout the year, and keep abreast of changes to tax laws that could affect your deductions and credits.

Related Articles
  1. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  2. Retirement

    10 Ways to Save Your Retirement: It's Not Too Late

    It's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
  3. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  4. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  5. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  6. Retirement

    This Is How You Could Live in Costa Rica for $1,000 a Month

    Explore the cost of living in Costa Rica, and learn how you could sustain a nice middle-class lifestyle for yourself on about $1,000 a month.
  7. Professionals

    How to Protect Your Portfolio from a Market Crash

    Although market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
  8. Professionals

    Why Women Are Underprepared for a Spouse’s Death

    Women are typically less prepared for the death of a spouse than men. An advisor can help mitigate some of the financial burdens widows may end up facing.
  9. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  10. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. Why is the Cayman Islands considered a tax haven?

    The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does ... Read Full Answer >>
  3. Why is Luxembourg considered a tax haven?

    Luxembourg has been the tax haven of choice for many corporations and mega-rich individuals around the world since the 197 ... Read Full Answer >>
  4. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  5. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  6. Why is Panama considered a tax haven?

    The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!