10 tax tips for seniors

senior tax tipsEvery year about this time, I receive a lot of mail from seniors who are confused about whether they should file a tax return. The confusion stems from the fact that many seniors receive income from sources that might not be taxable, such as Social Security and tax-exempt bonds.

Whether you're a retiree or someone helping a senior family member or friend with taxes, here are 10 tax tips to help ease you through the tax season and maximize your deductions:

  1. Don't assume that you don't have to file. While it's true that Social Security income is generally not taxable, that's not true in all cases. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. For more on who must file a tax return, see this prior post.
  2. Determine how much of your Social Security benefits may be taxable. If part of your Social Security benefits are taxable, how much is taxable depends on the amount of your benefits plus other income. As a general rule, the more income you have, the more likely that some portion of your Social Security benefits will be taxed. To figure this out, you first need to calculate your "base amount." Your base amount is equal to half of your Social Security benefits plus your other income (including tax-exempt interest). If that amount exceeds the limits for your filing status, some portion of your benefits will be taxable. For 2009, the limits are: $25,000 for single, head of household, or qualifying widow(er); $25,000 for married filing separately if you lived apart from your spouse during the year; $32,000 for married filing jointly; and $0 for married filing separately when you lived with your spouse during the year.
  3. You may be entitled to a higher standard deduction. If you file using the standard deduction, remember that you are entitled to a higher deduction if you and/or your spouse are 65 years old or older. For 2009, that deduction is worth an additional $1,100 per married taxpayer ($1,400 if single or head of household). If you and/or your spouse is blind, you're entitled to an even higher deduction.
  4. You may qualify for the Making Work Pay Credit. Most retirees don't qualify for the Making Work Pay credit, unless they receive earned income. But if you do work outside of the home, even on a part time basis, you may qualify. To find out, you need to do a few calculations.
  5. You may qualify for additional tax credits. You may qualify for the Credit for the Elderly or Disabled if you and/or your spouse are at least 65 years or are considered permanently and totally disabled. You must meet certain income qualifications found by completing a "long form" (form 1040 or 1040A). You won't find the credit on the "short form" (form 1040-EZ), so if you think you may qualify, make sure you use the correct form.
  6. Taking care of grandchildren and other dependents may entitle you to additional tax breaks. In this economy, it's not uncommon to see families living together as bigger units, with the grandparents paying the lion's share of expenses. If you're supporting your family, you may be entitled to claim some of them as dependents, even if one or more of them is not your child. For more information on exemptions and dependents, see this prior post.
  7. Don't forget about local and state taxes. Many states, such as New Jersey and Pennsylvania, offer additional tax credits, tax breaks, property tax and rental rebates, and tax freezes for seniors. In some cases, these tax breaks are refundable, which means you may be entitled to money back even if you don't owe any tax.
  8. Be aware that a lot has changed. The Tax Code is constantly changing, and these changes may affect you. In fact, a significant percentage of changes to the Code in recent years involve retirement accounts and tax credits. A great example is the new conversion rule for Roth IRAs: It's only in effect for 2010. Some great resources for tracking changes that affect you include WalletPop and the AARP Web site.
  9. Get free help. In addition to many community groups that offer free tax services for seniors, the IRS administers programs that provide free help. Consider using the Tax Counseling for the Elderly (TCE) program, which provides free tax help to people 60 and older. TCE programs rely on volunteers, which means the level of returns that can be prepared is generally basic. For more information on TCE, call the IRS at 1-800-829-1040. As part of the TCE Program, AARP offers the Tax-Aide counseling program at more than 7,000 sites nationwide. Tax-Aide is the nation's largest free, volunteer tax assistance and preparation service. It's available to low- and moderate-income taxpayers over the age of 60. To locate the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's Web site.
  10. Get your money back faster. Don't be afraid of e-filing or direct deposit. If you e-file (generally available at the free sites mentioned in #9) and use direct deposit, you will usually receive your refund within two weeks of filing. In most cases, these services should not cost you more money unless you use a paid preparer. Always ask about fees upfront when using a paid preparer so there are no surprises.

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