Federal income tax significant events, Part 6 – Retirement

This article is the sixth in a continuing series about significant life events that have an impact on your federal income tax return filed with the Internal Revenue Service (IRS).  The topic of this article is retirement and events generally associated with reaching age 65.  Further reading about this area is available on the IRS’s web site.

In general, when you reach “retirement age,” which is officially age 65 per the IRS’s tax code, the tax code is more favorable to you.  This includes:

  • A higher income level before you have to pay federal income tax
  • An increased standard deduction, assuming you do not choose to itemize deductions
  • A credit for the elderly or disabled for those who qualify

Even once you reach retirement age or approximately age 65, income is still taxable except when it is specifically excluded from taxation.  Exclusions that are commonly related to retiring or events closely related to age 65 include the following:

Compensation for Certain Services

If you perform volunteer work as a part of the Retired Senior Volunteer Program (RSVP), the Foster Grandparent Program, the Senior Companion Program, or the Service Corps of Retired Executives (SCORE), and you receive monies in reimbursement of related expenses or of your services, you need not include it in your taxable income.

Distributions from Retirement Plans

Distributions from retirement plans composed of money that was taxed at the time it was placed in the retirement plan, such as with a Roth IRA, are excluded from taxation at the time you receive a distribution from the plan.  The calculations to determine the taxable amount can be complicated depending on the structure of a given retirement plan, and it is usually a wise idea to have the assistance of a tax attorney in calculating the appropriate taxable amount.

Receipts Related to Injury or Illness

If you have a health or disability plan to replace your income in the event you are injury or become too ill to work, the payments you receive from such a plan are not taxable to whatever extent you paid for the health or disability plan (as opposed to the part that your employer paid for the health plan).  Health and disability plans subject to exemption include but may not be limited to the following when they provide payments related to injury or illness: long-term insurance contracts, workers’ compensation, Federal Employees’ Compensation Act (FECA), and no-fault auto insurance.

Life Insurance Proceeds

Proceeds paid to you under a life insurance policy, whether at the time of someone’s actual death or as an accelerated death benefit, are not taxable to you as income.

Gain from the Sale of a Home

Any gain you receive from the sale of your home up to $250,000 is excluded from taxation.  This amount is double if you are filing a joint federal income tax return.

Amounts Received Related to a Reverse Mortgage

Any payment you receive under a reverse mortgage loan is not considered income to you and is therefore not taxable on your federal income tax return.

Additional Items

The following additional items are also generally excluded from your taxable income:

  • Gifts and inheritances
  • Veterans’ benefits
  • Public assistance benefits, such as welfare, state funds for crime victims, Home Affordable Modification Program (HAMP), mortgage assistance payments, and Nutrition Program for the Elderly
  • Medicare

 

If you have reached age 65 or have retired and you have questions about your federal income tax, whether it relates to one of the areas mentioned above or other topics, you can speak with a tax attorney who can help address your specific questions and situation.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.