Roth,-John

by John Roth, Director of Tax Strategies

At each phase of life, tax obligations change as your circumstances change. In the early working years, filing a tax return may be as simple as reporting your W-2 wages and waiting for your refund.  In the middle years many people find themselves starting a family, buying a house and building wealth and investments, which adds complexity to the tax picture.

In the retirement years, life is simpler for some but not all.  Your sources of income change significantly moving away from employment based earnings to Social Security benefits, IRA and/or pensions distributions and the spending down of your accumulated wealth.

Recognizing that many seniors are dependent on fixed incomes, there are many tax deductions and incentives for retirees.  Some of those include:

  • A deduction for personal exemption of $3,950 and a standard deduction of $6,200 ($12,400 if married filing joint) but those over 65 (or blind) are entitled to an additional standard deduction of $1,550 ($1,200 for each spouse over 65 when filing a joint return).
  • Itemized deductions, including all medical expenses that exceed 10% of Adjusted Gross Income (AGI). But if either spouse is over 65, the threshold is lowered to 7.5% of AGI.
  • Part or all of nursing home bills may be included in medical expenses. While the exact amount depends on the level of care provided and the reason for the nursing home stay, the deductible care can range from 15% to 35% for nursing services in a residential facility to 100% for assisted living or skilled nursing facilities.
  • Medical expenses also include long-term care insurance premiums, health insurance premiums (including Medicare Part B and D premiums deducted from your Social Security benefits) and most other out of pocket medical costs.
  • Those continuing to work after retirement may continue to contribute to IRA accounts until they reach age 70. While most workers can contribute only $5,500 per year, those over age 50 are allowed to contribute up to $6,500.
  • A portion of a retiree’s social security benefits may be taxable depending on the taxpayer’s AGI level. However, the maximum amount of annual benefit that is subject to tax is capped at 85%.
  • Distributions from IRA and pension accounts are subject to federal income tax, but distributions from Roth IRA accounts are not taxable if the recipient is over age 59 ½ and the Roth IRA account was established more than 5 years prior to the distribution.

Many states also provide special tax treatment for retirees. A few examples:

  • Missouri allows a partial or complete exclusion of public and private pensions, military pensions and Social Security benefits from tax. The amount excludable varies based on the recipient’s income.
  • Illinois excludes all Social Security benefits, IRA distributions and pension benefits from state tax.
  • A person over 65 living in Georgia is allowed to exclude all Social Security benefits and up to $65,000 of other retirement income.
  • South Carolina allows a person over 65 to exclude all Social Security benefits and $15,000 of other income including up to $10,000 of retirement income.

We hope this gives you additional insight into what you can expect from tax season as a retiree. As always, you can contact your Moneta Group advisor team if you have any additional questions.

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© 2015, MONETA GROUP INVESTMENT ADVISORS, LLC. ALL RIGHTS RESERVED. THESE MATERIALS WERE DEVELOPED FOR INFORMATIONAL PURPOSES ONLY AND DO NOT TAKE INTO CONSIDERATION YOUR PARTICULAR SITUATION, FINANCIAL OR OTHERWISE. THE INFORMATION HEREIN WAS DERIVED FROM SOURCES DEEMED TO BE RELIABLE BUT HAVE NOT BEEN INDEPENDENTLY VERIFIED, AND NO REPRESENTATIONS OR WARRANTIES ARE MADE WITH RESPECT THERETO.