Retirees are eligible for variety of special tax breaks
By Deborah Adamson
Advertiser Staff Writer
The government's version of the senior citizen's discount comes in the form of special tax breaks for retirees.
Once they reach age 65, senior citizens are eligible for a variety of breaks, such as Social Security and pension benefits free from state taxes, tax credits for the disabled and higher personal exemptions.
"There are various tax benefits for those who are retired and who are 65 and over," said Shawn Hasegawa, a certified public accountant at Matsuno, Fukuya in Honolulu.
U.S. citizens or residents 65 years or older and single have to file a federal return if they have a total taxable income of $8,950 including money, goods, property and services.
For heads of household, the threshold is $11,200; for those married and filing jointly, the threshold is $16,550 if only one spouse is 65 or older. If both spouses are 65 or over, they must file if their total income is at least $17,500. For a qualifying widow or widower with a dependent child, such as a grandson, the threshold is $13,500.
In Hawai'i, money from Social Security and a pension paid for by the government or a company is not taxable. A retirement plan in which the employee and employer both contributed, such as a 401(k), is partially tax-free: What the company contributed is not taxable, providing the employee kept records to show how much was matched over the years. But it can be difficult to separate company money if employees rolled over the plan when they switched jobs.
On the federal level, Social Security is exempt from taxes only if it's the sole source of income, Hasegawa said.
Since Hawai'i excludes Social Security and pension benefits, the result is a lower adjusted gross income — or total income after some deductions.
Both federal and state tax laws let people deduct medical costs only if the total exceeds 7.5 percent of their adjusted gross income. Thus a lower state AGI means they can more easily meet the threshold, said Aaron Masuoka, a certified public accountant at Deloitte & Touche in Honolulu.
Patients' portions of doctors' bills, hospitalization, surgery, prescription drugs, long-term-care insurance and health insurance — and even indirect expenses such as meals, lodging and transportation to get medical care — can be deducted in many instances.
But patients cannot deduct expenses for such things as nonprescription medicine, nutritional supplements, bottled water, health club fees, social activities such as swimming lessons, teeth whitening and weight loss that's unrelated to treatment for obesity.
The state personal exemption rises to $7,000 from $1,040 for those who are blind, hard of hearing or disabled, Masuoka said. A doctor or optometrist must sign state tax form N172. The perk is for all ages.
Retirees age 65 or older in Hawai'i can take an extra exemption. For example, a retired couple can take four exemptions instead of two — deducting their taxes by $4,160 instead of $2,080. On the federal level, a retiree age 65 or over gets a higher standard deduction.
Elderly people also need to remember to withdraw the minimum required from their IRAs after reaching age 70ý, Masuoka said. If not, they'll be penalized by 50 percent on what they should have withdrawn, plus pay federal income taxes on the amount.
They can ask their mutual fund company, brokerage or custodian of their account to calculate the minimum withdrawal amount.
Those with several accounts should figure out the minimum withdrawal required from each one. They can choose to withdraw this total amount from any account or from several accounts. So those with stocks that are finally making money might want to withdraw from their bond accounts, instead.
Some people may consider converting a traditional IRA to a Roth IRA, in which they withdraw money free from federal or state taxes. When they convert, they'll have to pay taxes on the IRA. But they'll probably save on taxes because they'll be retired and in a lower tax bracket.
Empty nesters considering downsizing their homes should remember that $500,000 in profits are tax free in the sale of a primary residence for a married couple filing jointly.
For individuals, the profit ceiling is $250,000. They have to have lived in the home for two out of the past five years. The gain is exempt from federal and state taxes.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
