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


SKL
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No, I don't think so.  Maybe I don't see the whole picture, but why should someone be able to save pre-tax income, gain interest, and then pay no tax on either part of it?

 

Or, invest in land/businesses and then sell them for a profit, and pay no tax on that money?

 

My family is quite poor and I have Many family member who live on just SS income.  It is not enough to live on, and I completely understand that.  But you are talking about people who have had incomes high enough to have Saved so much money that they are getting back 90,000 a year, and want them to pay zero taxes.....um, no! 

 

Being retirement age, doesn't mean that they are suddenly not using tax supported services. 

 

 

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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.

 

Since people who are retired get their primary income from SSI or payouts from their retirement plans, I don't think this is necessary. Contributions to their retirement plans were tax free at the point of contribution - taxes have never been paid on this income. While it would personally benefit me to not have to pay tax on that income when I retire, I really can't make a logical case for exempting it. Taxes are hard for almost everyone and the elderly are not the only ones that have special difficulties preparing them. 

 

 large number of the elderly don't have to file taxes at all (those who only receive SSI don't usually have enough income to require them to file). 

 

There is already an exemption for low income elderly people because SSI benefits aren't taxable unless a person makes more than $25K (married, filing jointly $32K) in income (calculated by adding 1/2 SSI + other income + tax exempt interest income). 

 

One thing I would love to see is the ability for adult children to deduct expenses they are paying on behalf of their parents, like insurance premiums, prescription drugs and non-Medicare covered home health aids. 

 

My dream would be a flat tax, though. 

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Free help with filling out tax forms, by some organization that isn't also responsible for processing the taxes, would seem like a decent idea. 

 

This is available in many (not all) communities through senior centers and other community organizations. 

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Great. (I don't live in the US. I also have dyscalculia and am not a senior, and I depend on a lawyer friend to do these things for me. Such a free service could help many people who aren't seniors as well. Taxes are complex business. The same agency that processes taxes does offer such a service, but I am not sure that they would be as helpful as possible, you know?) 

 

a bit off topic, but I'm curious: does your country not have a tax preparation software? Here in the US, you don't have to be able to do any sort of calculation or math to do your taxes - you can simply input your info into a computer program and that does all the adding etc. Dyscalculia would not affect your ability to use such a program here, as long as you would be able to correctly put in numbers that you read off a paper

 

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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, 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].

 

Rollover and traditional IRAs are invested with before-tax funds and grow tax-free. Taxes are paid at withdrawal. Exempting IRAs from taxes would mean wealthier Americans would be able to shelter large sums of money from the government. I don't think any money withdrawn from rollover or traditional IRAs should be tax free.

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I'd rather see increased property tax breaks so that seniors aren't forced out of their homes.  If they have $90,000 worth of income, they can afford to have someone prepare their taxes, and that would be a pretty huge tax break for someone at that income level.  Though I do get what you are saying about the elderly having difficulty with this.  I do my parents' and my elderly aunt's taxes.  Maybe a flat tax for people 75 and older?  The other problem with this is that a very large segment of a population would soon fall into this category.  We're going to have enough trouble continuing to make social security and medicare payments as our population ages.  I think cutting out income taxes for this same group would be a big problem.

Edited by OnMyOwn
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I'd rather see increased property tax breaks so that seniors aren't forced out of their homes.  

 

My parents got a slight break for a while because they don't have children in the public schools. States offer different tax breaks for seniors on their state income taxes. I found this for reference, but I haven't fact checked it, so use at your discretion! 

Edited by TechWife
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I'd rather see increased property tax breaks so that seniors aren't forced out of their homes.  If they have $90,000 worth of income, they can afford to have someone prepare their taxes, and that would be a pretty huge tax break for someone at that income level.  Though I do get what you are saying about the elderly having difficulty with this.  I do my parents' and my elderly aunt's taxes.  Maybe a flat tax for people 75 and older?  The other problem with this is that a very large segment of a population would soon fall into this category.  We're going to have enough trouble continuing to make social security and medicare payments as our population ages.  I think cutting out income taxes for this same group would be a big problem.

 

http://www.census.gov/people/wealth/files/Wealth%20distribution%202000%20to%202011.pdf

 

Overall, seniors are more wealthy than the average American. Right now, there is a transfer of income from young workers to older, wealthier retirees and demographics are such that the burden on young people will only get worse as the population ages.

 

No, I don't think seniors, by benefit of age, should be exempt from an income tax. Low income, yes. Medical expenses (which the tax code allows a deduction for, above a certain percentage), yes. Reduction in property taxes, absolutely. But income tax? Not anymore than other taxpayers.

Edited by ErinE
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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?

 

Personally, I think SS income should be treated similarly to taxing IRA distributions. The seniors paid into the system (as did their employers), but that was PRE-tax money. When you withdraw IRA money, you are taxed on it, assuming it was a pre-tax IRA . . . Essentially, you are deferring taxation until you are old and presumably in a lower tax bracket and also, the earnings/etc compounded all those years w/o taxation, your IRA or similar funds can grow more than it would have otherwise. But, in any event SS contributions were pre-tax . . .

 

That said, I think there should be a fairly high exemption on all income taxes, say maybe 40-50k/adult + 10k/dependent. 

 

That way, anyone with a modest income won't pay income taxes (they pay plenty of other taxes, though), but those with high incomes do. SS maxes out at around 3500/mo, so that sort of exemption could be set high enough to exempt everyone who is living solely on SS. Personally, I'd rather have a world where if I'm lucky enough to retire with $$$ and so SS income is a small part of my income/asset base, then I'll pay some extra taxes then. While, those (or me) who are unfortunate enough to face retirement where their SS income is their entire income stream, they won't pay any income taxes. I think that *in general* things work out this way now with all the complex deductions/exemptions/etc, but it'd make more sense to me to make it simpler.

 

Also, FWIW, the home mortgage deduction favors the younger folks who are paying big mortgages, where many/more retired folks either have no mortgage or are renting. Everything is just so complicated . . . I wish it were simpler . . . I could afford to pay more taxes if I wasn't spending 5 figures each year in CPA fees . . .

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

 

No, the maximum SS benefit is under $32,000.  Some seniors have other sources of incomes from a private pension, retirement distributions, jobs, investments, rentals, royalties.  The last tax return I did was for a man who received a bit more in royalties from a creative work product as he does from SS. Not wealthy by any means but a very decent income for one man living in a subsidized senior apartment.  He owed some taxes but not a lot.  I think exempting him while taxing a 4 person family at his income level would be unfair.  

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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.

They are complicated enough that I have to pay a CPA for the privilege of making sure I pay the government the correct taxes. That's too complicated.

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SKL, this is off topic.

 

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

 

I'm not SKL nor an expert . . . but here's my AMT low-down as we've faced it a few times (I think we narrowly avoided it a few times, might have paid it once or twice) . . . 

 

The point of the AMT was to hit high earners who earned a lot but used tons of loop holes to avoid paying taxes. The idea was, "Hey, rich guys -- 1%'ers -- go ahead and calculate your complicated tax forms with all those fancy deductions . . . Then, redo it without all (mostly) of those deductions, and we're gonna take a lower percentage, say 20%, and whichever way shows you owing more, you pay that, either your regular tax OR the ALTERNATIVE MINIMUM tax . . ."

 

Problem is that it was originally intended to only apply to very high earners, but the income threshold wasn't indexed to inflation or fixed legislatively. For whatever reason, our lame ass congress "fixes" it for a year at a time, usually really late in the tax year . . . To nudge it up towards a higher income applicability, but then it reverts the next year to the old/low threshold . . .

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Personally, I think SS income should be treated similarly to taxing IRA distributions. The seniors paid into the system (as did their employers), but that was PRE-tax money. When you withdraw IRA money, you are taxed on it, assuming it was a pre-tax IRA . . . Essentially, you are deferring taxation until you are old and presumably in a lower tax bracket and also, the earnings/etc compounded all those years w/o taxation, your IRA or similar funds can grow more than it would have otherwise. But, in any event SS contributions were pre-tax . . .

 

That said, I think there should be a fairly high exemption on all income taxes, say maybe 40-50k/adult + 10k/dependent. 

 

That way, anyone with a modest income won't pay income taxes (they pay plenty of other taxes, though), but those with high incomes do. SS maxes out at around 3500/mo, so that sort of exemption could be set high enough to exempt everyone who is living solely on SS. 

 

There are different types of IRA.  For a traditional IRA, you make contributions after tax and then it's not taxed when it comes out.  Roth IRAs you pay contributions with pre-tax dollars but it is taxed coming out.  Roths are more popular because most people will be in a lower tax bracket in retirement than while they are working FT.  

 

No one pays SS taxes on their SS benefits.  A few, if they have a higher income, pay income tax on up to 85% of their SS benefits.  

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There are different types of IRA.  For a traditional IRA, you make contributions after tax and then it's not taxed when it comes out.  Roth IRAs you pay contributions with pre-tax dollars but it is taxed coming out.  Roths are more popular because most people will be in a lower tax bracket in retirement than while they are working FT.  

 

No one pays SS taxes on their SS benefits.  A few, if they have a higher income, pay income tax on up to 85% of their SS benefits.  

 

I may be slightly dyslexic, but am I reading you right?  Roth IRAs are invested after-tax and you don't pay tax on them when you take them out.  They are popular with people who think they are going to have a higher tax rate when they retire.  Traditonal IRAs and 401Ks are investments of pre-tax savings and are taxed when the money is taken out. They are popular with people who expect their tax rate to be low in retirement.

 

My own 401K is a combination of pre-tax and after-tax.

 

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There are different types of IRA.  For a traditional IRA, you make contributions after tax and then it's not taxed when it comes out.  Roth IRAs you pay contributions with pre-tax dollars but it is taxed coming out.  Roths are more popular because most people will be in a lower tax bracket in retirement than while they are working FT.  

 

No one pays SS taxes on their SS benefits.  A few, if they have a higher income, pay income tax on up to 85% of their SS benefits.  

 

 

I think you have the Roth & traditional backwards.

 

My mom had a traditional one, and the earnings are taxed as you take it out. I know, because I handled her taxes, and because I inherited half of it, and now I get to pay the taxes, as it was all considered pre-taxed money, so not subject to estate tax exemptions, etc. I pay taxes on every dollar distributed (so, both her pre-tax contributions and all earnings) as regular income. The contributions were pre-tax; that was a big benefit as she was earning high income when she saved for retirement but relatively low once retired. 

 

Dh and I now have SIMPLE IRAs of our own which, so far as I understand, are comparable tax-wise to a traditional IRA (but with higher contribution limits as it is designed for small businesses as a simpler alternative than setting up a 401K). The SIMPLE IRA takes my money pre-tax, but I'll pay taxes on everything later when it is disbursed. 

 

Roth IRAs have some advantages over traditional ones, but they are not available to people with incomes above certain limits. 

 

https://investor.vanguard.com/ira/roth-vs-traditional-ira

Edited by StephanieZ
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I think you have the Roth & traditional backwards.

 

My mom had a traditional one, and the earnings are taxed as you take it out. I know, because I handled her taxes, and because I inherited half of it, and now I get to pay the taxes, as it was all considered pre-taxed money, so not subject to estate tax exemptions, etc. I pay taxes on every dollar distributed (so, both her pre-tax contributions and all earnings) as regular income. The contributions were pre-tax; that was a big benefit as she was earning high income when she saved for retirement but relatively low once retired.

 

Dh and I now have SIMPLE IRAs of our own which, so far as I understand, are comparable tax-wise to a traditional IRA (but with higher contribution limits as it is designed for small businesses as a simpler alternative than setting up a 401K). The SIMPLE IRA takes my money pre-tax, but I'll pay taxes on everything later when it is disbursed.

 

Roth IRAs have some advantages over traditional ones, but they are not available to people with incomes above certain limits.

 

https://investor.vanguard.com/ira/roth-vs-traditional-ira

You are right, I totally did reverse them. I need some sleep. For realz as we have IRAs and I'm getting my CPA. #brainfart

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They are complicated enough that I have to pay a CPA for the privilege of making sure I pay the government the correct taxes. That's too complicated.

 

Do you have unusual circumstances?  I only ask because I have done my own taxes for years and while I agree there are some convoluted aspects to it sometimes, it's doable. 

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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.  

 

I'm referring to seniors who have memory and health issues with my post. Many people we would consider "seniors" (i.e., 65 yo) don't seem old and can handle most things on their own. However, frequently with age comes memory problems and I believe it would help to eliminate taxes beyond a certain age. I like SKL's idea of taxing everything at a certain age and then not paying any more taxes.

 

I think tax prep is a huge issue for many seniors. Depending on their mental ability, they may have trouble remembering which forms they should receive in the mail, when they should receive them, find out which ones didn't arrive on time, keep all their financial stuff up to date, and organize it and present it to someone doing their taxes. (And, if the senior is like my MIL, be willing to pay out money for things they should be able to handle on their own. After all, they prepared their own taxes each year. MIL may have thought paying someone else to do her taxes was a waste of money.) Even getting to a CPA/tax preparer/volunteer can be difficult.

 

My MIL can't do her taxes and didn't have anyone nearby to help her when she lived in another state. After FIL died several years ago, with the help of her out of state kids, she took everything to a tax preparer. When she picked up her taxes, she misunderstood the CPA to say she didn't need to file taxes anymore. So she didn't, even though all of her kids kept telling her she needed to. Now that she has moved near us, my dh has to figure out 6 years worth of back taxes and some of the needed documents aren't in her files. She would have probably owed nothing had she filed those years. DH has calculated the year she passes away (likely this year), she will owe, in part due to not filing for so many years.

 

I don't believe her situation is unusual. In the assisted living facility MIL lives are many other residents who have similar memory problems. I can't think of any of them who could collect their forms and deliver them to a tax preparer. I think seniors living on their own handling everyday issues (like dr appts, food prep, bill paying, etc) could struggle even more.

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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.

 

 

 

This isn't accurate. Here are the IRS definitions. A 401K is not a pension. A 401K is a defined contribution plan where the employee can choose where their funds are invested (limited by what the plan offers). The investment directly impacts the amount of money that is in the account and available to the employee. You can loose money with a 401K. Employers aren't required to pay into them unless it is a "safe harbor" plan or a "SIMPLE" plan. A pension is a defined benefit plan. The employer makes most (if not all) of the contributions, although sometimes an employee contribution is required or allowed. It all depends on how the pension is set up. The amount paid out to the employee is pre-determined and isn't dependent upon investment decisions. 

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There are different types of IRA. For a traditional IRA, you make contributions after tax and then it's not taxed when it comes out. Roth IRAs you pay contributions with pre-tax dollars but it is taxed coming out. Roths are more popular because most people will be in a lower tax bracket in retirement than while they are working FT.

 

No one pays SS taxes on their SS benefits. A few, if they have a higher income, pay income tax on up to 85% of their SS benefits.

You have the IRAs backwards.

 

Roths are popular because you can still contribute to them even if you don't qualify for the tax breaks of a traditional IRA. which applies to most who have access to a employer sponsored 401k.

 

Overall Roth IRAs are a great deal.

Edited by ChocolateReignRemix
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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.

 

Assuming you are talking about a 401K here, this wouldn't work because the value of a 401K is directly impacted by the stock market. It's value fluctuates, which is why the tax is spread out over time. The nature of a 401K would have to change in order for a flat tax rate on the account to be fair to everyone. 

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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.

 

 

I don't understand.

 

Money put into a savings account is taxed when it is earned. The interest earned is also taxed.

 

What am I missing? 

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I don't understand.

 

Money put into a savings account is taxed when it is earned. The interest earned is also taxed.

 

What am I missing?

Nothing really.

 

SKL is making the mistake of treating the SS tax as if it is money going into an investment account. While what a worker paid in/earned is recorded and used to determine pay out amounts, Social Security is a pay-as-you-go tax and Social Security payments are not a return of money paid I go the system.

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I'm referring to seniors who have memory and health issues with my post. Many people we would consider "seniors" (i.e., 65 yo) don't seem old and can handle most things on their own. However, frequently with age comes memory problems and I believe it would help to eliminate taxes beyond a certain age. I like SKL's idea of taxing everything at a certain age and then not paying any more taxes.

 

I think tax prep is a huge issue for many seniors. Depending on their mental ability, they may have trouble remembering which forms they should receive in the mail, when they should receive them, find out which ones didn't arrive on time, keep all their financial stuff up to date, and organize it and present it to someone doing their taxes. (And, if the senior is like my MIL, be willing to pay out money for things they should be able to handle on their own. After all, they prepared their own taxes each year. MIL may have thought paying someone else to do her taxes was a waste of money.) Even getting to a CPA/tax preparer/volunteer can be difficult.

 

My MIL can't do her taxes and didn't have anyone nearby to help her when she lived in another state. After FIL died several years ago, with the help of her out of state kids, she took everything to a tax preparer. When she picked up her taxes, she misunderstood the CPA to say she didn't need to file taxes anymore. So she didn't, even though all of her kids kept telling her she needed to. Now that she has moved near us, my dh has to figure out 6 years worth of back taxes and some of the needed documents aren't in her files. She would have probably owed nothing had she filed those years. DH has calculated the year she passes away (likely this year), she will owe, in part due to not filing for so many years.

 

I don't believe her situation is unusual. In the assisted living facility MIL lives are many other residents who have similar memory problems. I can't think of any of them who could collect their forms and deliver them to a tax preparer. I think seniors living on their own handling everyday issues (like dr appts, food prep, bill paying, etc) could struggle even more.

Wait...if she would have paid nothing those years, why would that affect her taxes now? There is no penalty for not filing if you do not owe taxes.

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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

 

I agree with this. My parents had age related health problems, but they did not become life threatening until they were at least 80 years old. My father's mental decline started when he was 83, my mom's has really just begun and she is 86. 

 

ETA: In reality, I do recognize there are huge variances in the way people age. But, going back to the OP's original question, what about the 35 year old who isn't mentally able to prepare their taxes? Why should the 65, or 70 or 80 year old get a break when the 35 year old doesn't? Age alone really isn't a good criteria, I don't think. 

Edited by TechWife
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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.

 

 

I think this is really the crux of the matter for me. Life is complicated. I can think of a lot more complicated things that I have had to navigate than completing my parents' tax form. I don't see it as something that should be exempted on the basis of age alone. 

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 When she picked up her taxes, she misunderstood the CPA to say she didn't need to file taxes anymore. So she didn't, even though all of her kids kept telling her she needed to.

 

The CPA may have actually said this and it could be absolutely correct. Not everyone has to file income taxes. It depends on the age of the person and the source and amount of income. This is a helpful little tax guide that shows the amounts for 2015. The guides for each year should still be available through the IRS. 

Edited by TechWife
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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.

 

I ran a quick estimator.  If dh were to work until 70, the total tax (under married-joint) on his SS-only income would be $2,100, assuming no itemized deductions.

 

ETA: Assuming today's estimated payments actually exist in 31 years!

Edited by Carrie12345
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The tax code is too complex. I like the Fair Tax plan. Something super simple with no exemptions would help everyone. I used to do our taxes but now that we have a couple of businesses we have to pay to have them done. It's annoying how complex and the constant changing is hard to keep up with if you're not in the business.

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I'm referring to seniors who have memory and health issues with my post. Many people we would consider "seniors" (i.e., 65 yo) don't seem old and can handle most things on their own. However, frequently with age comes memory problems and I believe it would help to eliminate taxes beyond a certain age. I like SKL's idea of taxing everything at a certain age and then not paying any more taxes.

 

I think tax prep is a huge issue for many seniors. Depending on their mental ability, they may have trouble remembering which forms they should receive in the mail, when they should receive them, find out which ones didn't arrive on time, keep all their financial stuff up to date, and organize it and present it to someone doing their taxes. (And, if the senior is like my MIL, be willing to pay out money for things they should be able to handle on their own. After all, they prepared their own taxes each year. MIL may have thought paying someone else to do her taxes was a waste of money.) Even getting to a CPA/tax preparer/volunteer can be difficult.

 

My MIL can't do her taxes and didn't have anyone nearby to help her when she lived in another state. After FIL died several years ago, with the help of her out of state kids, she took everything to a tax preparer. When she picked up her taxes, she misunderstood the CPA to say she didn't need to file taxes anymore. So she didn't, even though all of her kids kept telling her she needed to. Now that she has moved near us, my dh has to figure out 6 years worth of back taxes and some of the needed documents aren't in her files. She would have probably owed nothing had she filed those years. DH has calculated the year she passes away (likely this year), she will owe, in part due to not filing for so many years.

 

I don't believe her situation is unusual. In the assisted living facility MIL lives are many other residents who have similar memory problems. I can't think of any of them who could collect their forms and deliver them to a tax preparer. I think seniors living on their own handling everyday issues (like dr appts, food prep, bill paying, etc) could struggle even more.

You and I are saying the same thing, but we differ on how to solve the problem.  You even quoted my line that the most difficult part was collecting the paperwork.  My solution is to find help for seniors and yours is to eliminate taxing them.   I understand and sympathize with your situation - my MIL is 83 and has memory issues, and was the one who handled finances in their marriage. We have had to get far more involved with their finances and medical issues since MIL started her decline. It's not easy living 1100 miles away, but it can be done.  

 

Getting taxes done is a hurdle, but it's a once a year hurdle. Grocery shopping, medical appointments, food prep, bill paying, and transportation are issues they face multiple times a week. I can't get behind eliminating taxes when there are other issues seniors face more frequently and also impact quality of life. 

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People in the UK who only receive basic State Pensions (kind of equivalent to SS) don't have to file a tax return because their income falls below the threshold at which you start to pay tax.  My mother's pension amounts to around £8,000 pa (around USD12,000) and the threshold is over £10,000.

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This isn't accurate. Here are the IRS definitions. A 401K is not a pension. A 401K is a defined contribution plan where the employee can choose where their funds are invested (limited by what the plan offers). The investment directly impacts the amount of money that is in the account and available to the employee. You can loose money with a 401K. Employers aren't required to pay into them unless it is a "safe harbor" plan or a "SIMPLE" plan. A pension is a defined benefit plan. The employer makes most (if not all) of the contributions, although sometimes an employee contribution is required or allowed. It all depends on how the pension is set up. The amount paid out to the employee is pre-determined and isn't dependent upon investment decisions. 

 

I am aware of these complexities, but the payments are still reported on 1099-R and yes, I lumped them into "pensions" for simplicity's sake.  Do you think the 70+yo retired people who are receiving multiple 1099-R forms know how the heck to compute their required minimum distribution, taxable portion, bla bla bla for each of these forms?  Often they have several 1099-Rs because of switching jobs, their employers being bought out or changing plans, required rollovers, plans being transferred to a new administrator at some random date, etc.  Taxation sometimes breaks down further depending on what kind of underlying investments are included in each plan - which are often not under the control of the retiree.  It's a nighmare.

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I don't understand.

 

Money put into a savings account is taxed when it is earned. The interest earned is also taxed.

 

What am I missing? 

 

What you said in this quote is not contradictory to what I said.

 

I don't know what you are missing.  Are you still thinking that SS contributions are deductible when you pay in?  They aren't.

 

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Nothing really.

 

SKL is making the mistake of treating the SS tax as if it is money going into an investment account. While what a worker paid in/earned is recorded and used to determine pay out amounts, Social Security is a pay-as-you-go tax and Social Security payments are not a return of money paid I go the system.

 

No, I was not making a mistake, I was correcting another person who said social security receipts should be taxed like a traditional IRA because there is a tax deduction upon paying in, and because they are getting more than they paid in.  The part about getting more than they paid in is like getting interest - OK, I could see the logic of getting taxed on that part that exceeds what you paid in, just like people are taxed on interest.  I don't agree with the logic of taxing people on what they paid in when they were already taxed on that money.

 

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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.

 

 

Let me just clarify that my issue with older people's taxes is the complexity of having to figure out how to handle the taxation and tax breaks related to retirement earnings.  These would not apply to a young person who is ill and disabled.  A younger ill person will likely have some W-2 income and/or some non-reportable income, and some of them might find it worthwhile to itemize medical expenses (but not if the expenses are mostly covered by insurance / Medicaid etc.).  The tax reporting burden for a young ill person is not comparable to the tax reporting burden of an elderly person.

 

Edited by SKL
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OK so, at what level of income (including SS) would you support an exemption from filing?

 

I would go with a higher age, probably 80, and a simplified form rather than total exemption. But I'd like to see simplification of our tax codes, etc for all of us. I don't see my elder years as being my most difficult financially.

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A question: if you move from job to job, is there no way of consolidating company pensions?  In the UK, you can get a quotation from your new employer for taking on your old pension, then it's up to you whether you accept the quotation, leave the pension with the old employer, or transfer it into a private pension that you manage yourself.  When I last moved job, the transfer value did not make sense, so I set up a private pension, transferred it in, and can add to it/transfer in future pensions at will.  That means that I shouldn't have too many disparate sources of income in old age.

 

I am also currently negotiating to have my French state pension (I worked in France for two years) added to my UK one, again to simplify payments.

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Well, making a policy for elderly people *is* for everyone, excluding those who will die before they reach that age.

 

I understand the argument that they should just hire a CPA - and if so, let's at least give them a tax credit for doing that - but that assumes they have the ability to gather everything up and get to the CPA's office (or s/he will come to their house), and it also ignores the fact that some things need to be done at other times of the year.  Some things need to be done prior to the end of a tax year or prior to taking a distribution.  It's not as simple as just showing up on the CPA's doorstep each April.

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