Photo by Dietmar Temps at Flickr.com
I need to make this very clear—there is no law that says persons over the age of 65 do not have to pay taxes.
But obviously there’s some false information out there because I keep hearing people say they don’t pay taxes because they’re over 65. What’s worse is that I’m doing back tax returns for senior citizens who are in trouble because they believed that garbage.
Granted, things do change when you retire, but if you’re earning income, Uncle Sam wants you to pay taxes on it.
Now some people don’t make enough money to be required to file a tax return. Many of those people are senior citizens. I think that’s where the rumor about not having to pay started—some people don’t have to file because their income is so low they don‘t owe anything. But if you’re newly retired, you still need to prepare your tax return to make sure.
Here are some things that seniors get into trouble for:
Social Security income: most people think that social security isn’t taxable. For many people it’s not, but if you have other income, that could kick you into a category where your social security is taxable. If you’re preparing your own tax return, you need to include the social security income on your tax return. The computer program will calculate if any part of it is taxed—but if you leave it off, the program can’t help you.
Pension income: once again, many people think that their pensions aren’t taxable. Many pensions have a portion that isn’t taxable, but a completely nontaxable pension is extremely rare. Your pension must be reported.
Odd job—self employment income: Often seniors retire from their main job, and they’ll take on a small part-time job someplace just to get out of the house or to help out a friend who owns a business. They’ll receive a form 1099MISC for the pay. Under normal circumstances, the income would be small enough that they wouldn’t have to file, but if you have over $400 of self employment income—you’re required to file a return and pay self employment tax.
Stock transactions: Seniors tend to draw from their investments when they retire. As you draw funds from your mutual fund—you’re selling the shares. Let’s say you draw $10,000 out of your mutual fund—the IRS will receive information that says you made $10,000 from selling those stocks. As far as the IRS is concerned—you need to be taxed on that $10,000, plus that will probably kick you into having your social security be taxed as well. But the truth is, you didn’t make $10,000 on that stock transaction—you may have even lost money—that’s why it’s so important to file your return so the IRS knows you don’t owe as much as they think you do.
The biggest problem with not-filing your tax return is that it takes the IRS a few years to catch the problem. So by the time you get your IRS letter, they’ve already attached a “failure to file” penalty of 25%, and “failure to pay” penalty of up to 25%, and they’ve added interest on top of that.
So make sure you file your tax returns after you retire. I recommend filing every year, even if you don’t owe and even if you’re not required to file. It protects you from the failure to file penalty in the event the IRS “finds” something later.
Bottom line—you’re never too old to pay taxes.
Hi Sarah,
If you are under full retirement age for the entire year, you may make up to $17,040 before it affects your social security benefits. If you are over full retirement age, there is no limit to your earnings. Here’s more information from the Social Security website.
What is the amount allowable of other income make without it adversely impacting your social security ?
Hi Regina,
Since you are selling your main home, you are allowed to have a profit of up to $500,000 for you and your husband without having to pay tax on it. (Even if you weren’t married, you could still have a profit of up to $250,000 so you’d still be okay.)
The trick is reporting it. I’ve read mixed reports on whether to report a sale of a main home or not, but one of my clients who I really didn’t think needed to report the sale got an IRS letter, so now I always do.
Here’s what you do. (First, you might have tax software that walks you through it–that’s the easy thing to do.)
But basically, you sold the home for $68,000 so that’s the proceeds. Let’s say you bought it for $8,000, that’s the basis. This is all going to go on form 8949 part 2. The proceeds go in column D, the basis in column E. (You’ll know when you bought it and sold it and that stuff.)
In colum F you’re going to write “H”, it’s the code for the sale of your main home. That’s telling the IRS that this isn’t taxable. And in column G you’re going to write -60,000. That’s the adjustment because you’re claiming no capital gain. (The number will be different of course if you didn’t pay $8,000 to buy the house.)
Column H, that’s where you report the capital gain, will be zero, because the transaction isn’t zero.
I’m assuming that you’ll use tax software to do this, but I want you to know what it will look like when you do it.
Congratulations on the new farm!
We have loved in our home 25plus years.
We are selling it for $68,000. We bought a small farm from my son in laws brothers, for $35,000.
Do we pay taxes on difference?
This is only house I have sold