Tax policy: what do you think of exempting retired seniors' income under, say, $90,000?

[SKL]

I do taxes for some older retired people (friends and family), and it bugs me that the older you get, the more complicated it is.  Meanwhile, as we age, we gradually lose the abilities that make us capable of dealing with complexities - hearing, vision, memory, and more.  And the older people I deal with get so stressed out over taxes.  They've had the IRS or state tax folks come back to them over some intricacy regarding pension income - a 1099 they misplaced and forgot to report, a credit they didn't realize was an either-or choice.  Tons of stress created over a tax difference of a few hundred dollars.  Is it really worth it?

 

I wonder if it wouldn't make sense to just exempt all retired seniors' income over, say, $150,000 $90,000.  Below that, the complexities aren't worth the extra revenue the IRS stands to collect.  Above that, it could be more straight-forward instead of having 1,000 rules, and people could afford a professional to help them where it does get complicated.

 

Offsets could be a lower limit for deferred-tax savings or a higher tax rate on deferred-tax savings above a certain dollar amount, a one-time tax at a special rate, or probably 100 other options.

 

Thoughts?

 

ETA:  Clarified to talk about only retired people, and changed the amount since some people think $150,000 is a huge amount of money.  Keeping in mind this amount would include all (married filing jointly) social security income, pensions and IRAs [including return of corpus and interest/gains thereon].

Edited April 1, 2016 by SKL

[ErinE]

I think the more we fiddle with the tax code, the harder it is to do taxes. As the years have passed, I've become more attracted to a much flatter, simpler income tax code with a healthy income level exempt from taxes. As it is the bottom 50% of taxpayers (<$36,348 in 2013) pay ~3% of income taxes.

 

$150,000 is a lot of money, in the top 10% of income tax payers for 2013.

 

http://taxfoundation.org/sites/taxfoundation.org/files/docs/TF_FF491_Summary%20of%20the%20Latest%20Federal%20Income%20Tax%20Data%2C_2015%20Update.pdf

[SKL]

My thought is that with a high enough threshold, many / most seniors would not have to file taxes at all.

 

Maybe $150,000 isn't the right number, but I would want it to be a number that exempts the majority of seniors from having to file at all.

[kroe1]

Everybody needs to pay taxes.

[Valley Girl]

I'm not in favor of exempting people from paying federal income taxes based on age alone.

 

Edited to clarify which taxes I'm talking about.

Edited March 28, 2016 by Reluctant Homeschooler

[Lang Syne Boardie]

That amount is triple the median income in my state. It would probably exempt 99% of our seniors.

 

My grandfather didn't want to be excused from paying income or property taxes. He was a veteran and a good citizen who believed in the necessity of taxes. He just didn't want to be constantly trying to choose between his ever-rising property taxes and grandma's prescriptions. He didn't want to keep hearing about hundreds of acres of township land being sold to entities that are excused from property taxes (like our international airport and a new city dump) while homeowners face tripling property tax assessments.

 

In other words, he had a pretty long list of stuff he thought should be fixed before he was excused from paying taxes as if he were some sort of second-class citizen. He would have started with healthcare.

Edited March 28, 2016 by Tibbie Dunbar

[StephanieZ]

TBH, I wish they'd simplify ALL of our tax rules. It's insane. 

 

That said, I don't think senior citizens are deserving of more help than, say, a struggling young family with a special needs kid or two . . . 

 

I think our entire tax code needs desperately to be simplified. As does our health care delivery system. 

[Jane in NC]

What age are these seniors?

 

Most seniors (age 65+) whom I know have retired.  Some have a small part time job, others still command a solid income working part time in their professional field.  Are you saying exempt $150K from wages?  Many seniors also have income streams from investments. Are you exempting that too?

 

Frankly I can't see it...

[purplejackmama]

SKL, this is off topic.

 

Can you explain Alternative Minimum Tax to me? Pretend it's for a 5th grader :) my brain is mush.

[Farrar]

But... isn't the reason that the taxes get more complex because many people have more assets (property, retirement accounts), more complex exemptions (medical, etc.) and less income except from things like SS and other such benefits? Even aside from the amount being too high a threshold, I'm not sure what this would solve exactly. I get that taxes are stressful for older retirees - I think of my grandmother and I'm glad I don't have to figure any of that out. She's not paying much of anything, but there are a lot of different strands of things to track.

[SKL]

Yes, I'm talking about people over 65, but maybe I should specify people over 65 who are retired, i.e., they don't get a W-2 or 1099-misc.  And there would be an income limit, but it would be high enough to exempt seniors with modest income from having to file.

 

It wouldn't really be a tax exemption, but more of a filing exemption that results from a timing difference in taxing the income that funds pensions.  And also, social security wouldn't be taxed unless the person had a lot of other income.  One retired married couple had $25K of pension income, which was enough to make their social security benefit partially taxable, even with one of the spouses getting the legally blind credit.  That seems wrong to me.

[SKL]

Even aside from the amount being too high a threshold, I'm not sure what this would solve exactly. I get that taxes are stressful for older retirees - I think of my grandmother and I'm glad I don't have to figure any of that out. She's not paying much of anything, but there are a lot of different strands of things to track.

 

Well, exactly this.  She's not paying much of anything, so what is the point of her having to go through all that?

 

[SKL]

Everybody needs to pay taxes.

 

Many people don't pay income taxes though.

[SKL]

Here's a thought.  People think it's OK to tax seniors on their social security income (which, by the way, they paid in for).  Would they agree, then, to tax people on other benefits such as housing subsidies?  Tuition grants?  Medicaid?  Free school lunches?

Edited March 28, 2016 by SKL

[Farrar]

Well, exactly this.  She's not paying much of anything, so what is the point of her having to go through all that?

 

 

But someone else might be? I don't know... I'm no expert. I could definitely be persuaded with the right data I guess, though $150k seems absurdly high. We don't make that much and we do pretty well. I'd be so lucky to be pulling that in post retirement somehow...

[SKL]

The thing is, most of the money people are receiving from pensions is money they saved in the past.  It's not new money that is just falling from the money tree.

[SparklyUnicorn]

I'd make the cut off way lower. 

 

 

[regentrude]

I see no reason why people should be exempt from paying taxes based on their age.

 

I find the statement that below 150 k complexities aren't worth collecting the revenue simply ridiculous: most people have incomes under 150 k.

And unless you have a business and complicated investments, taxes in the US are not that complicated.

Edited March 28, 2016 by regentrude

[SparklyUnicorn]

Here's a thought.  People think it's OK to tax seniors on their social security income (which, by the way, they paid in for).  Would they agree, then, to tax people on other benefits such as housing subsidies?  Tuition grants?  Medicaid?  Free school lunches?

 

I don't think it's ok to tax on any of that including social security income.  Who thinks that?

 

 

 

[SparklyUnicorn]

Although if we are talking about pensions (and not stuff like 401K) did they really save that money?  I thought that was something paid by an employer (and something that is becoming increasingly rare).  In terms of 401K type accounts, they aren't taxed on that money as they save it.

 

 

[regentrude]

The thing is, most of the money people are receiving from pensions is money they saved in the past.  It's not new money that is just falling from the money tree.

 

Pensions are typically not money saved by the employee, but money the employer invested in a  pension fund.

 

And retirement investments made by the employee are either funded with income  before taxes (401k or 403b), and you pay the taxes when you receive the money - at a time in life when your tax bracket is typically lower - or with income after taxes but then your payout will be tax free (Roth).

So, they are NOT taxed twice on the same income.

 

Edited March 28, 2016 by regentrude

[shawthorne44]

I don't think it's ok to tax on any of that including social security income.  Who thinks that?

 

I do.  

 

• They weren't taxed on what they paid in.   
• They are taking more out than they put in.   Way more unless they die within a few years of starting.   Therefore we have a huge SS deficit.  

[SKL]

Although if we are talking about pensions (and not stuff like 401K) did they really save that money?  I thought that was something paid by an employer (and something that is becoming increasingly rare).  In terms of 401K type accounts, they aren't taxed on that money as they save it.

 

Pensions used to be more employer contribution, but over time it has switched to more employee savings.  Yes, pensions include 401K, including the part you pay in.

 

Yes, many of these amounts (not all of them) are tax-deferred, but I'm suggesting that it might be better to reduce the tax-deferral benefit in favor of exempting pension income when folks are older.

 

Another idea is to have a one-time taxation out of the tax-deferred amount when the person reaches a certain age, and then no more taxation after that.  RIght now, the rule is that when you reach a certain age, you have to start taking a minimum amount each year so it gets taxed.  Might as well just apply a flat tax rate to the whole amount and be done with it.

[Ausmumof3]

But many would still have to track it all to prove they're under the threshold and that threshold seems absurdly high to me. My dh and I are feeding and clothing five of us on well less than that and paying a lot of tax.

 

I am in favour of simplifying tax where possible but I agree that the issue is multiple income sources etc.

[SparklyUnicorn]

 

I do.  

 

• They weren't taxed on what they paid in.   
• They are taking more out than they put in.   Way more unless they die within a few years of starting.   Therefore we have a huge SS deficit.  

 

 

Does anyone make enough from SS alone to warrant paying taxes?  I'm just wondering.  I thought payouts were actually pretty low.

I'm ok with paying taxes taking all income into consideration, but if they are only getting SS I bet they wouldn't be paying much in taxes anyway.

[SparklyUnicorn]

I still think the cut off should be lower than 90K (from the 150K you first proposed).

 

 

[umsami]

I'm totally fine with that.  You work hard all your life, there should be a break.  I'm also not comfortable with property taxes on the elderly.  It can really be a hardship, especially if the area has gone up in value. 

[regentrude]

Yes, many of these amounts (not all of them) are tax-deferred, but I'm suggesting that it might be better to reduce the tax-deferral benefit in favor of exempting pension income when folks are older.

 

Another idea is to have a one-time taxation out of the tax-deferred amount when the person reaches a certain age, and then no more taxation after that.  RIght now, the rule is that when you reach a certain age, you have to start taking a minimum amount each year so it gets taxed.  Might as well just apply a flat tax rate to the whole amount and be done with it.

 

How is that simpler that leaving things the way they are and tax any income according to the same rules?

 

If any simplification to the tax code is to be made, I would think it should be treating ALL income the same, whether it is from employed work, or capital gains.

[LucyStoner]

I think that if a family of 5 is living on less than $90K a year and paying taxes, 1-2 person households can pay taxes if they are earning $90K.

 

SS benefits are not taxed until you reach a certain threshold of non-SS income.  Some retirement withdraws are not taxed.  Well off seniors have more income than the average person from capital gains which is taxed at a lower rate.  Seniors get medicare, which most people don't. In some places seniors get property tax breaks. 

 

So no, I am not in favor of exempting $90k in income from taxes for, uh, pretty much anyone besides a HUGE family. 

 

Also, this would affect very few people.  Most seniors aren't living on 90K a year.  The average income for households where the head of the house is 62 or older is about $33K.  They aren't generally dealing with a high tax burden. If they are caring for grandkids, they get tax credits as well. 

Edited March 28, 2016 by LucyStoner

[SKL]

 

I do.  

 

• They weren't taxed on what they paid in.   
• They are taking more out than they put in.   Way more unless they die within a few years of starting.   Therefore we have a huge SS deficit.  

 

 

SS employee contributions are not tax-deductible.

 

They currently are usually getting more than they put in, BUT had they put that money in the bank, they would be earning interest on that.  And they would be taxed on the interest, but not the corpus.

 

[SparklyUnicorn]

I'm totally fine with that.  You work hard all your life, there should be a break.  I'm also not comfortable with property taxes on the elderly.  It can really be a hardship, especially if the area has gone up in value. 

 

I am definitely in favor of tax breaks on property taxes.  A lot of places do offer that.  My grandmother has her taxes done, despite not paying taxes, because she needs the information to get a discount on her property taxes.  They do them for free for her at the senior center. 

 

She makes such a low amount even though she has SS AND a pension. 

[SKL]

Pensions are typically not money saved by the employee, but money the employer invested in a  pension fund.

 

And retirement investments made by the employee are either funded with income  before taxes (401k or 403b), and you pay the taxes when you receive the money - at a time in life when your tax bracket is typically lower - or with income after taxes but then your payout will be tax free (Roth).

So, they are NOT taxed twice on the same income.

 

 

1099-R pension income includes both defined-contribution and defined-benefit plans.

 

I am aware of tax deferrals on certain retirement savings.  I did not say they were taxing the same income twice.  I am saying it is a dumb administrative nightmare and not worth it for retirees who aren't making a ton of money.

 

[SparklyUnicorn]

SS employee contributions are not tax-deductible.

 

They currently are usually getting more than they put in, BUT had they put that money in the bank, they would be earning interest on that.  And they would be taxed on the interest, but not the corpus.

 

 

Oh taxing on saving account interest really chaps my rear!  It is such a piddly arse amount.

[LucyStoner]

I'm more concerned with raising the income and sol for average to poor seniors than I am in cutting taxes for a tiny number of higher income seniors.  Also, I am in favor of lowering the age for full SS retirement for low wage workers in back breaking or physically demanding jobs and for seniors who become unemployed too late to retrain and can't get a job even if that means raising my own full SS retirement age.

Edited March 28, 2016 by LucyStoner

[regentrude]

 I am saying it is a dumb administrative nightmare and not worth it for retirees who aren't making a ton of money.

 

Why would it make a difference for this whether the people are retired or not? Even 90k is a substantial amount of money and way above median income. Not to mention that taxes are more complicated for younger people who have kids in college, save for retirement, and run a business.

 

Edited March 28, 2016 by regentrude

[SparklyUnicorn]

I'm more concerned with raising the income and sol for average to poor seniors than I am in cutting taxes for a tiny number of higher income seniors.  Also, I am in favor of lowering the age for full SS retirement for low wage workers in back breaking or physically demanding jobs and for seniors how become unemployed too late to retrain even if that means raising my own full SS retirement age.

 

Yeah a senior making 150K or 90K just on retirement income is living pretty high on the horse.  I don't know anyone in my family who has that kind of money.  Not even those who live comfortably. 

[SKL]

Like I said, a retired couple I helped received $25K in pension income and that was enough to push their $32K SS income into partially taxable.  So we're talking a couple receiving less than $60K income, most of which previously came out of their paychecks (some pre-tax and some after-tax), and with all their health problems, mobility issues, etc. etc. they still have to pay tax on part of their SS income (as well as their pension income).  And they are supposed to calculate exactly how much of the SS income is taxable etc.  Not everyone has a CPA friend/relative to help with this.

 

Their total tax (before some deductions and credits that are not typical) was $400.  Is it worth it to the US Treasury to put modest-income seniors through this for $400 each?

 

I also think we should recognize that life as an elderly person is more difficult and more expensive and just plain harder than life as a younger person.  Just the driving to the medical appointments for example.  I think elderly retired people deserve a break.

Edited March 28, 2016 by SKL

[SKL]

Why would it make a difference for this whether the people are retired or not? Even 90k is a substantial amount of money and way above median income. Not to mention that taxes are more complicated for younger people who have kids in college, save for retirement, and run a business.

 

Sure, it's complicated for younger people, but younger people have more ability to deal with that.

 

I picked $90K not because I think it's subsistence living, but because I wanted a figure that would exempt most seniors from the administrative hassle.  If you make it $50K, then everyone still has to go through the administrative trouble to prove they are exempt, so that wouldn't help at all.  If it's $90K, most seniors wouldn't have to worry because they easily fall below that threshold.

 

[regentrude]

I also think we should recognize that life as an elderly person is more difficult and more expensive and just plain harder than life as a younger person.  Just the driving to the medical appointments for example.  I think elderly retired people deserve a break.

If by "elderly" you mean old, frail, and beset by many medical ailments, maybe. But I do not believe the average 65-74 year old leads a more difficult and harder life. Many many retired people seem to do quite well.

http://www.ncpa.org/pub/ib135

Edited March 28, 2016 by regentrude

[Annie G]

Like I said, a retired couple I helped received $25 in pension income and that was enough to push their $32K SS income into partially taxable.  So we're talking a couple receiving less than $60K income, most of which previously came out of their paychecks (some pre-tax and some after-tax), and with all their health problems, mobility issues, etc. etc. they still have to pay tax on part of their SS income (as well as their pension income).  And they are supposed to calculate exactly how much of the SS income is taxable etc.  Not everyone has a CPA friend/relative to help with this.

 

I also think we should recognize that life as an elderly person is more difficult and more expensive and just plain harder than life as a younger person.  Just the driving to the medical appointments for example.  I think elderly retired people deserve a break.

 

My inlaws have about 50K in income between pension, SS, and interest from things like bonds, CDs or other investments.  Their tax person charges $225 to do their taxes, which doesn't seem like a financial burden on someone making their income.  This year they had us look at it to see if we could do it and save them the money- it's pretty easy.  The biggest trick seems to be knowing when all the 1099 forms are there and not losing any of them. 

 

Everyone deserves a break- young kids just out of college or just starting out on their own...young families raising children...folks in their 50's who are sending kids to college....folks who are getting close to retirement and are trying to boost their savings so they can meet retirement goals.   

 

I'm not saying that elderly people don't need more help, but tax prep or paying taxes doesn't strike me as a big issue. Other things you mentioned like driving to medical appointments- and understanding and doing what the docs recommend is a bigger burden for elderly than tax prep.  Grocery shopping, food prep, household chores, home maintenance, bill paying, and fielding all the phone scams that come in are pretty troublesome to elderly people.  

[LucyStoner]

 

 

I also think we should recognize that life as an elderly person is more difficult and more expensive and just plain harder than life as a younger person.  Just the driving to the medical appointments for example.  I think elderly retired people deserve a break.

 

In some cases.  Not in all or even most cases.

 

Also, who do you think is taking care of a lot of seniors?  Often their kids who are sandwiched between caring for their parents and caring for their own children.  

 

Who drives my dad to appointments and pays for the gas (to borrow from your example)?  That would be me or my husband or my brother or my brother's husband.  Sometimes he takes the bus (he's pretty fit for mid-seventies) but we cover anything that he needs help with.  We also feed him quite a bit and make sure he stays on his meds. And we pay for him to join us on our (cheap) family vacations and make sure he gets stuff he really enjoys (like opera tickets) for his birthday.  I don't begrudge my father that help in the slightest (nor did I for my mom before she died) but his life is quite a bit less expensive than mine and my younger brother and we all live modestly.  Our next housing decision is largely going to be based on the need for my dad to live with us at some point (so we want a MIL apartment or secondary dwelling of some sort).  I don't think this is a rare scenario.  ETA:  while my dad is fit, he has health issues that aren't cheap.  But he gets most everything covered via the VA or medicare.  He was in worse condition before he became eligible for medicare and approved for VA care because he was uninsured from his early 60s until medicare kicked in and not seeing the doctor is not a good option for someone with his health factors.  So his life isn't cheap due to lack of healthcare needs by any measure.  

Edited March 28, 2016 by LucyStoner

[maize]

1099-R pension income includes both defined-contribution and defined-benefit plans.

 

I am aware of tax deferrals on certain retirement savings. I did not say they were taxing the same income twice. I am saying it is a dumb administrative nightmare and not worth it for retirees who aren't making a ton of money.

 

Well, I find filing my own taxes to be a dumb administrative nightmare and not worth it for a family making well below your proposed cutoffs.

 

I don't particularly see why seniors should be a special group?

 

I would be in favor of tax simplification. I think I would increase the per-person exemption and standard deduction and do away with most deductions and credits. Increase the capital gains tax rates. Increase our top tax brackets (further split out top brackets). Get rid of AMT.

[SKL]

Oh well, I guess when you all are doing taxes in your mid-70s it will be interesting to see if you still feel the same way.

[regentrude]

Oh well, I guess when you all are doing taxes in your mid-70s it will be interesting to see if you still feel the same way.

 

I know plenty of people who still work in their mid seventies.

[SKL]

I know plenty of people who still work in their mid seventies.

 

I'm sure you do.

 

And I know people that age who have been through severe cancers and chemo and radiation and loss of vision and hearing and bladder control and who are wheelchair bound, unable to drive, unable to sleep, having severe anxiety all the time, losing their memory, hospitalized, in rehab, unable to eat most things, having to test their blood sugar a dozen times a day, etc etc etc.

 

Edited March 28, 2016 by SKL

[Luanne]

No one is making $90,000 off of social security alone.

[regentrude]

And I know people that age who have been through severe cancers and chemo and radiation and loss of vision and hearing and bladder control and who are wheelchair bound, unable to drive, unable to sleep, having severe anxiety all the time, losing their memory, hospitalized, in rehab, unable to eat most things, having to test their blood sugar a dozen times a day, etc etc etc.

 

 

But there are very ill younger people, too. It has nothing to do with age alone.

A tax break for the ill and disabled is one thing... a general exemption for healthy, well off people just by virtue of having reached a certain age quite another.

 

Besides, filing taxes is not the most complicated thing in a person's life. There's a lot of other stuff.

 

Edited March 28, 2016 by regentrude

[SKL]

 

Besides, filing taxes is not the most complicated thing in a person's life. There's a lot of other stuff.

 

 

But it would still be nice if there were one less thing to worry about when there is so much complexity to deal with.

 

[SKL]

I think in general we should do more to make older people's lives easier.  The medical stuff is of course a big thing.  We could and should do better.

 

Of course it's not every person of a given age who needs help, but obviously it correlates with ageing.

Edited March 28, 2016 by SKL

[SKL]

It's not like older people haven't made any previous contribution to the common good.