The IRS just realized we’re getting older

The IRS is midway through designing an income tax form just for us baby boomers.

The new form, called the 1040-SR (U.S. Tax Return for Seniors), promises to look a lot like the old short-form—1040-EZ—that was mothballed. It’s just one of several tax-related items seniors should be on the lookout for next tax season.

The 1040-SR has a streamlined look and larger print, but apart from aesthetics, it differs from the 1040-EZ in a couple of significant ways.

The old form topped out at taxable income of $100,000 and was only available for standard deduction taxpayers filing as single or “married filing jointly.” The new form is still in development, but currently allows itemizing or using the standard deduction, which for seniors over age 65 is larger: $13,300 versus $12,000 for “youngsters.” As currently configured, both partners in a joint 1040-SR must be 65.

Check out a draft of 1040-SR at www.irs.gov and email comments to [email protected]

Tools for lower taxes in retirement

The Feds have also designed a tool so we can better take advantage of potentially lower taxes in retirement. The IRS recently issued a new Tax Withholding Estimator so you’re less likely to face a surprise come tax time. The estimator features user-friendly language for intake questions, such as your marital or filing status, withholding, adjustments, deductions and credits. These determine how much to withhold during the year. This guidance is especially helpful to retirees whose income may come from several sources including Social Security, part-time work, Health Savings Accounts, and retirement accounts.

Withholding can be a tricky question for seniors. If you have one or more sources of income that are not taxable, you risk withholding too much and allowing Uncle Sam to hold onto your money for up to a year. For instance, the first $34,000 of Social Security is not taxable for a married couple. (For income from $32,000 to $44,000 you ramp up to your regular tax rate.) The rest is taxable at your regular rate. Roth IRAs are not taxable because you used post-tax money to fund them.

The same is true for life insurance proceeds, which are generally not taxable unless you receive more than the death benefit declared in the policy. In that case, the surplus is considered taxable interest.

Reverse mortgage payments, whether by lump sum, monthly payment or line of credit, are not taxable. The IRS considers them loan proceeds, not income. This is not necessarily a good reason to get a reverse mortgage, but important to know nonetheless.

Funds drawn from Health Savings Accounts are not taxable. HSAs basically become like (Roth) IRAs after age 65, and are the only sources of income that are not taxed going in or out.

Avoid taxes all together

There is one other move that avoids taxation. If you’re over age 70, you can make donations with up to $100,000 per year from your tax-deferred IRA. These funds, paid directly from your financial institution to a 501(c)3-accredited organization, are not taxable to you or the charity. Who says there’s never a free lunch?

Alimony

One notable change instituted by the 2017 Tax and Job Savings Act regards the tax-deductibility of alimony. You can’t deduct alimony or separate maintenance payments made under a divorce or separation agreement (1) executed after 2018, or (2) executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification. Alimony and separate maintenance payments you receive under such an agreement are not included in your gross income. The old rules apply for unmodified divorces before 2019.

It’s hard not to feel picked upon when tax season comes. For all this advice, it’s worthwhile to pass it by your tax accountant for whether and how the changes apply in your specific situation.