In general, you have to file a tax return and pay taxes when your income is higher than the IRS’s standard deduction. This amount varies depending on whether you file a single or joint tax return, and whether you’re the head of household.
However, there could be a light at the end of the tunnel where you don’t have to file a tax return ever again.
If your income is from Social Security benefits only, you don’t have to file. Depending on when you started receiving benefits, this could mean that your tax return days could be over as soon as the age of 62.
Social Security Benefits Aren’t the Same as Income
Even though Social Security income can be taxed, if it’s your only form of income, you may be exempt from paying taxes. In plain English, this means you can stop filing!
In the golden era of Social Security (before 1983), these benefits weren’t taxed at all. However, as the elderly population has grown, the burden on the system has increased. As a result, the government has decided to try to recoup some of those payouts if the recipient has other forms of income.
If you’re not working, you may naturally conclude that your only income is from Social Security. Not so fast… Even if you’re retired and not working in any capacity, you could still have taxable income.
401(k) accounts and traditional IRAs both count as income that can be taxed. On the other hand, a Roth IRA is treated differently. The rule is that if you’ve retired after 60 years of age, your withdrawals aren’t taxed. There are additional loopholes past the age of 70, too.
Investment income from assets like real estate, stocks, and bonds is also taxable. To avoid having a high tax burden in your retirement years, your financial advisor may suggest withdrawing from these accounts first, and then following a specific strategy that draws upon less heavily taxed assets.
When You Must File Taxes
There are general threshold requirements based on age and income that dictate whether you have to file taxes. The conditions shift slightly each year, so make sure you check with a tax professional before making any concrete decisions.
As of last year, you would have to file taxes if you:
Again, if Social Security is your only income, the government concludes that gross income is zero, and you are excused from filing a federal tax return.
For married couples, the rules are slightly different. Your combined income must not exceed $27,400. If one partner is younger than 65, the taxable threshold drops to $26,100. The effect of this shift is that your tax threshold becomes lower, and more seniors will end up having to pay if they have a spouse who is of “working age.”
Remember, these income figures should be calculated absent of Social Security benefits. If your income from a salary or investments amounts to less than these amounts, you don’t have to file.
When to Include Social Security in Your Income Calculations
The government rewards the behavior they like by giving tax breaks and other benefits that are commonly referred to as loopholes. Though, generally speaking, Social Security isn’t taxable if your income is below a minimum threshold, there are exceptions:
1. If you file a separate tax return than your spouse, then 85% of your Social Security benefits are taxable.
2. If the sum of 50% of all sources of income, including tax-exempt interest and Social Security, exceeds $25,000 for single filers or $32,000 for joint filers. This calculation can be tough to wrap your head around, so we can walk through it together during a complimentary tax analysis.
Why You Might Want to File a Tax Return Anyway
If your income is below the threshold or your income comes solely from Social Security benefits, you don’t have to file, but you might still want to send in a return. This idea might sound counterintuitive, so bear with us. There could be circumstances that warrant you filing a tax return.
The most compelling reason is that you’re due a tax refund. These refunds could be in the form of:
Further, if you do have losses from investments, you’ll want to make sure you file so that you can potentially claim those losses as a credit in future years. Without filing, the IRS won’t have a record of the losses, which would prevent you from being to claim a credit during a more profitable year.
The same principle is true for business losses, but the rules are slightly different. For example, a net loss from business operations, also called a net operating loss or NOL, can be carried for two years. This gives you some flexibility on when and how you want to apply a business loss.
What About State Taxes?
These exemptions are meant for federal taxes only. Each state is different, so you’ll want to check with an accountant familiar with the laws and policies in your state to find out if you still need to file state taxes.
At Levy & Associates Tax Consultants, we can help you make this determination. If you’ve been looking for a “tax professional near me” to help answer your toughest tax questions, you’ve finally found your answers! Contact us today to discuss your situation and get a free tax analysis. We can run through various scenarios to find the best approach for your financial situation.