More than half of older taxpayers (57%) are worried they’ll have to pay more taxes this year because of the 5.9% Social Security cost-of-living adjustment in 2022, according to a January survey by The Senior Citizens League, a nonpartisan seniors group.
Taxes for the over-65 set can feel more complicated for a variety of reasons: There are often multiple streams of income, some retirees still work part time, and people may be managing required minimum distributions from retirement accounts.
“It can happen that people have more income in their later life than they did when they were working,” says Barbara O’Neill, a certified financial planner in Ocala, Florida, and the author of “Flipping a Switch: Your Guide to Happiness and Financial Security in Later Life.”
For older adults, here are some items to keep in mind this tax season:
1. Medicare thresholds matter
Your income can affect your Medicare Part B and Part D premiums in the future because of the income-related monthly adjustment amount, or IRMAA. Medicare premiums are based on your tax return from two years prior, and you may have to pay more if your income exceeds certain thresholds.
These Iincome-related surcharges can be difficult to manage “because they operate as a cliff, not a phase-in,” says Edward Jastrem, a certified financial planner in Westwood, Massachusetts. “For example, if you are $1 over an income tier, you are subject to the full surcharge.”
In 2023, people filing individually with a modified adjusted gross income of more than $97,000 in 2021 — or jointly with more than $194,000 — will pay higher monthly amounts for Medicare. “Tax bracket management becomes crucial in later life,” O’Neill says.
2. Required distributions can go to charity
At age 73, you are required by the IRS to start taking required minimum distributions from tax-deferred retirement accounts. But once you hit age 70 1/2, you can have some or all of your required minimum distributions sent directly to a charity of your choice. This move will still count as a required minimum distribution, but the amount isn’t added to your taxable income.
“If you take a regular RMD from your IRA, it gets added to your adjusted gross income for tax purposes,” says Ian Weinberg, a certified financial planner in Woodbury, New York. “It usually throws you into a higher bracket.”
Sending money directly to charity is called a qualified charitable distribution, and you can do this with up to $100,000 of your annual required minimum distributions.
3. Side businesses change the tax approach
About one in four adults 50 and older say they’re doing gig work or freelancing, according to a January survey from AARP.
If you’re doing gig work, that counts as business income — which means you can deduct business expenses. This includes health insurance premiums if you’re paying for your own insurance. “Self-employed older adults on Medicare can deduct Medicare premiums for themselves and their spouses against business income,” O’Neill says.
Other deductible expenses may include business supplies, home office costs and advertising expenses, which may include costs to run a website.
4. Social Security may be taxable
Many people don’t realize that Social Security benefits are taxable if your income meets certain thresholds.
The portion of your Social Security benefits subject to federal tax is based on your combined income, which is the total of your adjusted gross income, nontaxable interest and half of your Social Security benefits. If you’re filing taxes as an individual and your combined income is over $25,000 — or over $32,000 if you’re filing a joint return — you may pay income tax on up to 50% to 85% of your benefits.
But Oregon doesn’t tax Social Security as income.
The Oregon Department of Revenue says Oregon doesn’t tax any amount of your Social Security, Railroad Retirement Board, or railroad unemployment benefits. Social security and Railroad Retirement Board benefits both have subtractions on the Oregon return. Go here, to page 84, for more information.
5. State tax breaks may be available
Your state may offer tax deductions or credits for retirees, so do some research. (In Oregon, several breaks are available, according to the Oregon Department of Revenue.
Federal Pension subtraction. If you include a taxable federal pension as part of your income, you may be able to subtract some or all of it. The amount is based on the number of months of federal service or points earned for retirement before and after October 1, 1991. Go here, to pages 74-75, for more information.
Oregon Medical subtraction. The revenue department says Oregon also allows for a special subtraction for some qualifying medical and dental expenses, depending on your age and federal adjusted gross income.
For more information, a worksheet, and examples, go here, to pages 84-87.
Retirement Income credit. Taxpayers who were age 62 or older as of Dec. 31, 2022, and have taxable retirement income may qualify for this credit. Qualification is limited based on household income and Social Security and/or Tier 1 Railroad Retirement Board benefits. Household income is different from adjusted gross income.
For further information, how to calculate retirement/household income and the credit, and qualifications, go here, to pages 109-110.)
This article was written by NerdWallet and was originally published by The Associated Press. Oregon-specific additions by The Oregonian/OregonLive. The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Kate Ashford, CSA® writes for NerdWallet. Email: [email protected]. Twitter: @kateashford.