4 Tax Changes Retirees Need To Know
Tax law is constantly changing, and even retirees are not immune from annual updates. In fact, seniors in particular have their own set of laws and rules to follow that may not even apply to younger taxpayers.
Learn: 12 Types of Passive Income That Aren’t Taxable
More: 3 Signs You’re Serious About Raising Your Credit Score
Retirees need to keep abreast of the latest information because the IRS does tweak various tax-related numbers on a regular basis, typically every year. Although major changes are rare, there have been a few relatively significant changes made to IRA rules for seniors in recent years.
Here are the most important ways in which taxes are different for retirees rather than younger taxpayers, including a look at the most recent developments regarding IRAs.
When You Have To Take Your Required Minimum Distributions
IRS rules state that you can’t access money in your IRA (including a SEP-IRA or a SIMPLE IRA) before age 59 ½ without facing a 10% early withdrawal penalty. But on the other side of that equation is the age at which you must begin taking withdrawals from your IRA, which are known as your required minimum distributions, or RMDs.
For decades, the rule was that once you turned 70 ½, you had to take your first annual withdrawal within six months, and then by the end of the year every year thereafter. This all changed with the SECURE Act of 2019. Under the new law, that deadline was pushed until Dec. 31 of the year in which you turned age 72, although those turning 70 ½ before Jan. 1, 2020 still had to follow the original rule.
This law changed again in 2022, under SECURE 2.0. Starting in 2023, seniors don’t have to take an RMD until age 73. Beginning in 2033, this age will jump once again, this time to 75.
It’s true that many seniors will have to begin tapping their IRAs before these ages anyway. However, for those who can live off other income, keeping their money in the retirement accounts longer allows for more years of tax-deferred growth.
Take Our Poll: How Much of a Tax Refund Do You Expect in 2023?
Reduced Penalties for Failure To Take RMD
Historically, if you failed to take your RMD by the end of the year, the IRS slapped a steep 50% penalty on the amount you didn’t withdraw. Under the new tax law, this penalty drops to 25%, or 10% if you correct the mistake in a timely fashion.
In reality, this fee is often waived by the IRS if the taxpayer can prove “reasonable error and that reasonable steps are being taken to remedy the shortfall.” However, it’s still an important change to note that in a worst-case scenario, the penalty for failing to take a timely RMD is not nearly as onerous.
How Much Income You Can Make Before Your Social Security Becomes Taxable
Social Security is an important source of income for most American seniors. While conceptually Social Security payments are tax-free, if you earn too much money, as much as 85% of your benefit could become taxable.
For tax year 2022, 50% of your Social Security benefit will be taxable if your “combined income” is more than $25,000 for individuals or $32,000 for couples. If your income is above $34,000 as a single or $44,000 as a joint filers, then up to 85% of your benefit may be taxable.
The Social Security Administration defines “combined income” as your adjusted gross income, your tax-exempt interest income and half of your Social Security benefit. In other words, even if you don’t draw a “regular” income but live off pension, 401(k) or interest income, some of your Social Security income could become taxable.
Extra Standard Deduction for Seniors Over 65
The standard deduction amount is indexed for inflation and typically rises from year to year. However, seniors over 65 — along with the blind or disabled — benefit from an additional standard deduction.
For tax year 2022, the standard deduction for single filers (or married individuals filing separately) is $12,950, up from $12,550 in tax year 2021. This amount is exactly doubled for joint filers, to $25,900 in 2022, up from $25,100 in 2021. But, if you’re a single filer age 65 or older in tax year 2022, that $12,950 standard deduction jumps up to $14,700.
For joint filers, if one spouse is 65 or older, the standard deduction is $27,300, increasing to $28,700 if both spouses are of age. Additional increases apply if either you or your spouse is blind.
More From GOBankingRates
- Social Security: Proposal for $2,400 Extra in Checks Expanded and Reintroduced in Congress
- Got a Question About Money? Ask an Expert
- Maximize your savings with these 3 expert tips
- Take Our Poll: How Do You File Your Taxes?
