Why Most Elderly Pay No Federal Tax

[mickeyd]

I was surprised to see how many 65+ folks pay no federal income tax. Then, why am I paying more? "Relentless rules of humble arithmetic" as J. Bogle puts it I guess.

The tax breaks for people over 65 are not “loopholes,” which require special knowledge or interpretations of the tax code, often by lawyers. Elderly tax breaks are explicit in the tax code. When applied to reduced retirement incomes, the tax preferences eliminate all tax liability for millions of older Americans.
One such preference is a higher standard deduction for age 65-plus filers than for younger tax filers. Other provisions exempt the majority of retirees from paying taxes on their Social Security benefits. Another way to think about the impact of our over-65 tax breaks is that eliminating them “would make 16.3 million current nontaxable units taxable,” the Center’s 2011 report estimated.

Why Most Elderly Pay No Federal Tax | Squared Away Blog

 

[pb4uski]

The only real tax breaks for people over 65 that come to mind are non-taxable SS at lower income levels and higher standard deductions for those who do not itemize.

It is not surprising to me that less affluent seniors pay no federal income tax as I did tax returns for my grandmother and an aunt and a friend of the family and none of them pay income tax. In fact, 2 of the 3 didn't even need to file a return.

I also do a returns for a couple more affluent seniors and they definitely pay income tax... in fact more than I do as a percent of income but I have a lot of 0% qualified dividends and LTCG.

 

[GrayHare]

Compared to those in the accumulation phase, older people likely have more deductions relative to income, especially medical and charitable.

 

[Blueskies123]

You must not know anyone that is old. IT IS BECAUSE THEY HAVE NO INCOME!!!!!

 

[audreyh1]

Exactly! It's because they are no longer earning wages!

We all know how taxes drop drastically for most early retirees - before age 65!

 

[ziggy29]

The only real tax breaks for people over 65 that come to mind are non-taxable SS at lower income levels ...

And IMO that's not even a tax break because SS deductions are AFTER tax,. and we've already paid tax on earnings subject to SS and then get taxed again on the payments.

It's almost criminal that the thresholds for SS taxation at 50% and 85% have never been adjusted for inflation. My mom's income tax burden more than doubled in 2006 when my dad died despite lower income, in part because it made 85% of her SS benefit taxable instead of 50% (and because she had to file single instead of MFJ), and we are talking about an income of around $50K.

 

[MasterBlaster]

And IMO that's not even a tax break because SS deductions are AFTER tax,. and we've already paid tax on earnings subject to SS and then get taxed again on the payments.

It's almost criminal that the thresholds for SS taxation at 50% and 85% have never been adjusted for inflation. My mom's income tax burden more than doubled in 2006 when my dad died despite lower income, in part because it made 85% of her SS benefit taxable instead of 50% (and because she had to file single instead of MFJ), and we are talking about an income of around $50K.

This is the so called survivors inverse marriage penalty. By design of our tax code singles pay more than married people. The tax code is inherently unfair to many people for many different reasons. Tell me how single elders should view the marriage tax-breaks your parents got and the extra SS money the (non-working) spouses get ?

Evidently, We get the tax system that we all have been voting for.

Your Mom should re-marry just to game the system.

 

[target2019]

Here's 5 year tax history for couple in mid 80's:
5,514.
5,696.
6,064.
6,664.
6,776

Not poor, not wealthy, but 40-50 years of working and doing without has them still paying tax after all these years.

 

[imoldernu]

80th year

Between using savings, Ira's, and SS, we have not had to pay Federal or state taxes since 1990. Comes from having had liquid assets and careful observation of exemption limits.

This will likely change in 2018, as we begin withdrawing from income producing assets.

Each year, after completing tax returns, we do a "next year" projection, which gives guidelines to tell us how much of our withdrawals will be taxed.

Five years ago we realized that we were leaving some non taxable assets on the table, and adjusted accordingly.

I suppose we left some $$$ on the table, but over the long haul, don't expect it was enough to have taken chances.

So... fat... dumb... and happy.

 

[gerntz]

And IMO that's not even a tax break because SS deductions are AFTER tax,. and we've already paid tax on earnings subject to SS and then get taxed again on the payments.

It's almost criminal that the thresholds for SS taxation at 50% and 85% have never been adjusted for inflation. My mom's income tax burden more than doubled in 2006 when my dad died despite lower income, in part because it made 85% of her SS benefit taxable instead of 50% (and because she had to file single instead of MFJ), and we are talking about an income of around $50K.

Why not help her out if it's financially painful for her?

 

[Fermion]

Hell, I am not even very old yet (45) and when we retired our federal taxes went from $60,000 a year to $1,500. Negative if you count ACA subsidy as sort of a tax break.

 

[eta2020]

Right.... but if you withdraw 100k a year from 401k you will pay plenty of taxes
While if you live on 90k dividend income you will pay 0 in taxes.

Most of the the elderly people are surviving on SS. Hence no taxes.

 

[Hermit]

I'll never get below the 25% tax bracket. Personally, I think its not such a bad problem to have.

 

[pb4uski]

I'll never get below the 25% tax bracket. Personally, I think its not such a bad problem to have.

Amen.

 

[bclover]

I'll never get below the 25% tax bracket. Personally, I think its not such a bad problem to have.

thinking the same thing. I'll take the extra income & pay the taxes over trying to live off of ss.

 

[haha]

This is basically ridiculous. At any age, you have income you pay tax. I am just now learning how to pay 4 digit income tax sometimes, rather than 5.

Ha


Sent from my iPhone using Early Retirement Forum

 

[Mulligan]

Amen.

I was going to complain since I will always be entrenched at 25% minimum. But since you and Hermit already posted and see the glass half full, I will go along too and cheerfully pay each year myself.

 

[scrabbler1]

Those over 65 still have the old 7.5% (of AGI) threshold for deducting OOP medical expenses, unlike the higher 10% put in place a few years ago.


My dad, 85, pays little, if any income taxes at the federal level and zilch at the state level (because our state exempts more of his income). In fact, when I saw this a few years ago, I had him make a call to his FA so she would stop withholding federal taxes from his IRA distribution. His federal income tax refund always matched the withheld taxes, so why bother having them withheld only to file and get the same money back months later?

 

[kaneohe]

Compared to those in the accumulation phase, older people likely have more deductions relative to income, especially medical and charitable.

Older people may very well have higher medical expenses but......
most often, with paid up homes and low state taxes as a result of lower incomes, they are unable beat the (higher for elderly) standard deduction .

 

[athena53]

We owed zero to the Feds and I was shocked. 2015 was our first year of zero wage income. We have pretty healthy deductions (mostly Medical and Charitable) and are not withdrawing from the IRAs yet. Most of our income is dividends and LT gains, plus DH's SS and my $10K annual pension. I even went back to the TurboTax worksheets to see if something was wrong. We did owe state taxes, though.


So, we got all our Federal estimated payments back. Some went to pay additional state taxes due and the rest was divided between our granddaughter's 529 and my HSA. I feel a bit guilty- it makes no sense when we can afford to fly to Reykjavik in Business Class for the second year in a row- but I'll live with it.

 

[Souschef]

I prepare taxes for elderly and low income people through the AARP/IRS program. Out of all the ones I have done this tax season, only one did not have to file.
I am assuming I have a biased sample, that the ones that do not owe anything do not come in to have their taxes done.

 

[audreyh1]

So, we got all our Federal estimated payments back. Some went to pay additional state taxes due and the rest was divided between our granddaughter's 529 and my HSA. I feel a bit guilty- it makes no sense when we can afford to fly to Reykjavik in Business Class for the second year in a row- but I'll live with it.

People who have a lot amassed in taxable investments that they draw down now, with very low taxes, paid a lot of taxes while they were building that pile, so no reason to feel guilty. Just remember the taxes you've already paid!

 

[ziggy29]

Why not help her out if it's financially painful for her?

She can afford it and she would refuse help anyway. But it is still a slap in the face (and the wallet) to see your tax burden doubled on lower income the year after grieving the loss of a spouse.

 

[LARS]

In the case of my parents, and the last 7 or so years of their lives, they paid virtually no taxes not because of no income, but instead because of astronomical deductible medical expenses.

I can assure you, given the choice, that they would've far preferred to pay income taxes.

 

[Options]

It's called tax bracket management and is a very important part of retirement planning. Fees and taxes are what eat into PF returns. It can be surprising the degree to which taxes can be minimized in retirement.