Make Work Pay Credit
While the “making work pay” credit proposes it will cut taxes for 95% of families, there is an interesting loophole for senior citizens, which is causing some to end up with unforeseen back tax liabilities. According to the law, non-working senior citizens-in addition to retired railroad workers and disabled veterans-cannot claim the full credit. The problem is that the credit automatically adds 6.25% of earned income to taxpayer’s paychecks. Therefore, if you are a senior citizen who does not qualify for the full credit, then you will need to make sure to change your withholdings to prevent owing a tax debt at the end of the year.
Taxes on Social Security income
The IRS has specific guidelines to follow when deciding whether you social security payments are taxable. Accidentally overpaying is okay, but if you make the mistake not to pay taxes on your social security benefits, then it could lead to IRS underpayment fines. These additional penalties, on top of the already owed taxes, can be difficult for struggling seniors to pay come tax time. Next time you receive a check from Social Security, be sure to check the benefit statement to see if you are having any taxes withheld. If you did not have any taxes withheld on social security and you have other sources of income, you may be creating for yourself an underwithholding problem come next tax season. To ensure that you are not creating an underwithholding problem, you should seek the advice of a tax professional. The tax professional can review your financial situation to determine whether you need to up your withholding to cover your expected tax liability.
When receiving pensions, you may have a hard time deciding how much to withhold, or if you want or need to withhold anything at all. Whether you should have taxes withheld from your pension payments depends on your filing status, number of dependents, personal exemptions, additional sources of income, and the amount of retirement payments you receive. If you do need to pay taxes, you need to figure how much to withhold. Withholding too much is not a good idea as you may end up giving the IRS an interest free loan. However, not withholding enough can result in hard-to-estimate taxes at the end of the year, which could lead to back taxes, penalties, and interest if you are not careful.
Be Aware of Deductions & Credits
When preparing your income tax return, it is essential that you take advantage all eligible deductions and credits since they will help to lower your total tax liability. Remember, the IRS has set up a number of deductions and credits directly targeting senior citizen taxpayers. To learn more about tax tips for seniors, check out this article on the RDTC.com blog.
If you are under 60 years old and need to take an early distribution from a retirement account, then be forewarned that you will likely have to pay an additional 10% tax on the funds withdrawn. However, the tax does not apply to funds from Roth IRAs, and there are various other exceptions to the tax. To learn more, check out the IRS’ list of the top ten facts about taking early distributions from retirement plans.
Accurate Tax Information
The best way to prevent unnecessary tax debts before they occur is to have your returns accurately prepared by a qualified professional. There are several community service programs devoted to helping senior citizens with tax preparation, and the IRS has also set up a free tax-counseling program to provide financial and tax planning advice to seniors all year long.