The answer: most likely, yes. But there are exceptions.
With tax day (less than) two months away, retirees and their caretakers may have questions about what forms of income or savings they have to pay taxes on. For some guidance, Seasons spoke with Agustin Arbulu, a tax attorney, former tax law professor, and president & COO of W Tax Group.
Keep in mind, the information here deals mainly with federal taxes. Individual states have different tax laws and different rules for retirees’ taxes. Some follow the federal rules, some do not.
Taxing Social Security
A useful document for anyone with questions about taxes on Social Security benefits is the Internal Revenue Service’s (IRS) Publication 915. It includes 33 pages of worksheets, resources and explanations.
“First rule to remember, [if] you’ve got no other income but Social Security, that’s all you’ve got, you’re not taxed,” Arbulu said. “But there are some caveats.”
Put simply, people receiving Social Security generally do not owe taxes on their benefits if their total combined income – including Social Security and all other forms of income – is under $25,000 in a given tax year. If the combined income is over that limit, a person may owe taxes on half their Social Security benefits; if their combined income is over $38,000, 85% of Social Security benefits may be taxable. This number changes if the person is married and filing jointly or separately.
Arbulu said people who receive Social Security benefits can choose to have taxes withheld from their checks if they choose.
Individual retirement accounts, pensions, 401(k), and side hustles
Money withdrawn from a person’s pension, 401(k) or traditional IRA will be taxed as income. That’s not so, however, for a Roth IRA, which is a special account that a person puts money into after paying taxes on it. The other big difference is that a person cannot touch the money in their Roth IRA for five years after putting it into the account. (Traditional IRAs are taxed when the money is withdrawn.)
Arbulu also said the IRS Schedule C allows seniors to operate their own small businesses as sole proprietorships and put that money directly into an IRA without having it count as income. However, he warned against setting up a Schedule C simply to absorb losses from spending.
“Schedule Cs quickly can become hobby losses, which is not allowed,” Arbulu said. “You have to be careful about that. Is your intent to make money, or is your intent to really just deduct personal items that you want to convert to business-related expenses?”
Report and document
“What taxpayers a lot of times think is, I made some money, and I’m just not going to report that,” Arbulu said. “That money that you made could very well end up being reported to the IRS.”
Arbulu cited gambling winnings and cryptocurrency gains as specific forms of income that may go unreported and be caught by the IRS.
It’s also important to correctly report anything a person plans to use as a deduction. Especially of concern for seniors would be medical expenses, which Arbulu said are fine to claim as deductions but must be properly documented.
“What I say to them is, document, document, document,” he said. “As long as you’ve got the documentation, claim it, but you’ve got to document.”
Additionally, Arbulu said seniors who travel in retirement may open up bank accounts in other countries, and in those cases, they must file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS.
“There’s nothing wrong with opening up a foreign bank account,” he said. “You’ve just got to make sure you disclose it.”
Retirees will probably want to take the standard deduction
Because a large portion of retirees live in houses that are already paid off, Arbulu said the deductions that come from costs like property tax and homeowner’s insurance will likely not meet the cost of the standard deduction. Therefore, a lot of seniors are going to prefer to take the standard deduction. Of course, some people will benefit from using itemized deductions, but Arbulu again warns against claiming deductions that are too large.
“If your itemized deductions are higher than your standard deduction, then you’re going to go with the itemized deduction,” Arbulu said. “But here’s the problem, if you go with itemized deductions, you’ve got to make sure that you’re not getting scrutinized by the IRS.”
Help and more information
Arbulu said AARP has good tax information for seniors and caretakers to use, and also cited Kiplinger and Forbes as sources on tax news and information. In addition, Arbulu’s own organization, W Tax Group, maintains a blog and provides tax services.