Expert offers end-of-year tax tips for retirees
Question: I’m a retiree, what financial information will I need to prepare my 2023 income tax returns?
Answer: Generally, gathering income and expenditure records for the year is the first step for most taxpayers. It’s important to have all necessary documents before starting your tax return to assure accuracy and help avoid processing delays that may slow any refund.
Many retirees are surprised to learn they may have to pay taxes on part of their Social Security benefits. In fact, income taxes can be one of the largest expenses in retirement, according to investment website FINRA. Whether a retiree will have to pay depends on several factors including overall annual income; sources of that income; and, whether filing joint or separate tax returns, according to Investopedia website.
Social Security recipients should get a SSA-1099 tax statement in the mail each January. Nonresident aliens or those who received or repaid Social Security benefits, will receive an SSA-1042S instead. These forms will show the total amount of benefits paid in the previous year and how much was reported to the Internal Revenue Service.
Benefits from pensions or annuities from qualified employer retirement plans may be taxable, in all or in part, unless the payments are qualified distributions from designated Roth accounts. To receive annual statements, taxpayers should complete and submit Form W-4P so the payer can withhold the correct amount of federal income tax from pension, annuity (including commercial annuities), profit-sharing and stock bonus plans, or individual IRA payments, according to the IRS.
Income from pensions and withdrawals from tax-deferred investments—such as traditional IRAs, 401(k)s, 403(b)s or similar retirement plans, along with tax-deferred annuities—are likely taxable in the year the funds are received. IRS Form 1099-R provides information on benefits paid and amount of federal income taxes withheld to qualifying senior taxpayers every January.
Next, there are specific forms for retirees for both state and federal returns. For federal taxes, those who are age 65 or older can use Form 1040-SR as an alternative to Form 1040, but still use Form 1040 schedules and instructions. Retirees will pay federal income tax on pension annuity proceeds and periodic pension payments at the scheduled rate as determined by their income bracket.
According to TurboTax, seniors receiving Social Security whose income exceeds the standard deduction will need to determine if some of their benefits are to be included in taxable income for federal taxes as well as certain state taxes. The 2023 standard deduction is $13,850 for single filers, $27,700 for joint filers or $20,800 for heads of household. Taxpayers 65 or older may be eligible for a higher standard deduction amount, according to Nerdwallet.
Consulting a professional financial planner prior to retirement can help determine which savings options will be the most beneficial for each financial situation as well as plan for future tax liabilities. Retirees may wish to engage a trusted tax preparation service or accountant in preparing their returns to minimize payments and maximize any eligible returns.