Tax Time Tips for Older Adults

With the filing deadline looming ahead, it’s the perfect opportunity to look at what changes might be in store for retirees and seniors.

Tax Backlog

If there was ever a year to move to digital tax filing, it’s this year.

The IRS says it is still dealing with a backlog of 24 million returns from last year, the result of staffing shortages and the pandemic.

“It was reported they were 24 million applications behind last year,” says Sam Zimmerman, CEO of Sagewell Financial in Cambridge, Massachusetts. “Tax filing is backed up in a way that we haven’t seen in some time.” He said the most- to-be-affected are returns filed non-digitally.

If you have been putting off e-filing their tax returns, this is the year to step into the 21^st century.

What that means for retirees and seniors is if you have been putting off e-filing their tax returns, this is the year to step into the 21^st century. In addition, filers should expect longer delays, Zimmerman says.

More tax tips

• Plan properly for Required Minimum Distributions (RMD). You must begin mandatory withdrawals at 72, which means paying taxes on the withdrawals. “If you’re in a window between 60 and 72, now is the time to start thinking if you should be utilizing things like Roth conversions. There, you’re moving money from your pretax account, paying the taxes now at perhaps a lower marginal income tax rate than you will have when you’re age 72,” says Nick Foulks of Great Waters Financial in Minneapolis, Minnesota. “These are some of the lowest taxes that we’ve had in modern history, so it may be wise at this point to go ahead and pay the taxes at a lower marginal income tax rate than you may be paying in the future.”

• Inflation tip. Series 1 savings bonds are returning 7.1 percent. Normally your contribution is capped, but you can put up to $5,000 of your tax return into those types of bonds, Zimmerman says. “You should definitely talk to your financial advisor. It’s a pretty safe instrument and it’s returning about what inflation is.”
• COVID charitable donations. The CARES act allows an additional $300 charitable deduction ($600 if filing jointly) for people who take the standard deduction. The deduction will be “above the line,” meaning it will reduce both your adjusted gross income and your taxable income, according to the AARP.
• Standard deduction is higher for seniors. The standard deduction changes for 2021 to $12,550 for singles, and $25,100 for married filing jointly or surviving spouses. If you are 65 or older your standard deduction increases by an additional $1,700 if you file as single or head of household and $2,700 for married filing jointly. “We want to make sure that you’re aware of that increase and then if you’re 65, you’re going to get that bonus on your standard deduction,” says Foulks.
• Medicare deduction. If you are self-employed, you can deduct all of your Medicare insurance deductions.
• Property taxes. Property tax deductions can be complicated, Zimmerman says. “Sometimes they happen at the school district level, sometimes the county level, sometimes the state level. And sometimes, in states like Maryland and New Jersey, a senior might have two different property tax exemptions or deductions that they qualify for, but oftentimes the forms are due at different times of the year. So definitely evaluate the options you have for senior-specific property tax deduction programs and expect to look at multiple levels.”
• Consider contributing to a 529 plan for your children and/or grandkids. A 529 plan is an investment account that offers a tax deduction if used for educational purposes for a designated beneficiary. “Adding to 529 accounts is always going to reduce your tax liability,” said Foulks. “So instead of maybe giving a really big Christmas present this year to one of your grandkids, you can give to them and give to yourself at the same time.”

“Always consult a tax professional before you make any big moves or make sure that you talk to somebody, like an investment advisor, so that you understand which moves might make sense in the totality of your plan,” Foulks says.

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Rodney A. Brooks is the former deputy managing editor/Money at USA TODAY. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has written for National Geographic, The Washington Post and USA TODAY. The author of “Fixing the Racial Wealth Gap,” Brooks has testified before the U.S. Senate Special Committee on Aging. His website is www.rodneyabrooks.com.