This year seems to be the year that seniors are getting slammed from all sides. First, there was no increase in Social Security benefits, but the Medicare premium they had to pay was increased leaving them with smaller checks. Last year we had a brief, additional federal tax deduction for real estate taxes which was specially designed to help senior home owners, but that was eliminated for this year.
Here in Missouri, the state recently ended the Historic Preservation Credit, which helped control senior’s real estate tax bills. And right now they’re trying to end the popular Property Tax Credit for seniors who rent instead of own their homes. (Some seniors have already felt the bite of this as the credit is now denied to seniors of subsidized housing.)
So instead of just harping on bad news, what are some tax tips and strategies that are available to senior citizens? First, even if you don’t make enough income to be required to file, file a federal return anyway. Why? Two reasons, the first is that you’re on the radar in the event the government offers some sort of tax rebate or credit for senior citizens. Many seniors missed out on the $250 rebate a few years ago just by not filing. Second, and this is probably even more important, is that if you file a return, there’s a statute of limitations where the IRS can’t come back after you for more money. If you don’t file a return, there is no statute of limitations. I’ve had to deal with seniors who now have tax liens on their homes because they didn’t file a return and the IRS came up with something years later. Had a timely return been filed, the IRS would have been too late to make the claim.
Another important strategy for seniors is planning their income. Depending upon your marital status, your social security becomes taxable once you reach a certain income. You don’t have much choice about how much you receive for your pension, and you’re required to take your minimum required distribution from your IRAs, but you have a lot of flexibility elsewhere. Right now, during the early part of 2011 is a good time to plot out your strategy for your next year’s tax return. If you’re anywhere near the borderline on taxable social security, planning is absolutely essential. Some strategies include: moving assets to a tax free munincipal bond fund, using the charitable donation option on your IRS to use your required minimum distribution, and selling stocks that have lost value to offset your capital gains.
A flip side strategy for some seniors would be if you’re already in a situation where 85% of your social security is going to be taxed, go ahead and do even more taxable transactions. This sounds crazy coming from me as I’m always trying to defer income and taxes, but hear me out. When you’re in the “taxable social security zone”, you’re really paying a double tax. If you’re in the 15% tax bracket, then you’re really paying 30% because that social security wasn’t taxable until you hit the zone. If you’re pushed into the 25% tax bracket, that extra income is really taxed at 50%. 50%! So, let’s say you have a year where you’ve already reached the point where 85% of your social security is going to be taxed. Once you’ve crossed that line, the IRS can’t tax anymore of your social security for that year, the remaining tax will be at the regular rate (25, 28 or 32% so it’s a tax reduction now.) It might just make sense to go ahead and do that extra income transaction now, if it will keep you from having to be in the extra tax zone next year. It’s really going to depend upon your individual situation