March 10, 2016 by Jean
This is my first year filing income tax returns as a retiree. For most of my adult life, I have done my taxes myself; my finances are usually pretty uncomplicated, and I enjoy working with numbers. Before tax preparation software was widely available, I had created my own spreadsheet to organize the information and do the calculations for my taxes. I have continued with this practice, using a spreadsheet and a calculator to get all the numbers sorted out and then using the free online fill-in forms to file.
Last year was an exception. With my highest-ever income and a mid-year move that meant I owed taxes to two states and two localities as well as to the federal government, I paid an accountant to take care of everything. This year, I decided to go back to doing my taxes myself. I started earlier than I normally do because I knew I had to learn about new forms (1099-R instead of W-2), and new tax schedules, deductions and credits.
I had very little taxable income this year. During my last decade of employment, I put away after-tax savings to support my living expenses in my first three years of retirement. My goal in doing this was to let my 403(b) retirement funds build up for another few years before I started drawing on them and to put off taking Social Security until I am 70 in favor of getting the higher monthly payment. I did take distribution of about $10,000 from a traditional IRA this year and I rolled over several thousand dollars from my tax-deferred retirement account into a Roth IRA so that I could pay the taxes this year rather than later when minimum distributions will put me in a higher tax bracket.
I began my tax preparation by downloading and reading the IRS Tax Guide for Seniors. This gave me a good overview of the types of income, deductions and forms needed for my taxes. It was a pleasant surprise to learn that seniors get a higher standard deduction, a higher amount of exempted income, and a more generous deduction for medical expenses. I opened my tax spreadsheet from 2013 (the last time I did my own taxes) and modified it to reflect the different types of income and deductions for senior citizens. Once I had entered the amounts of my deductions, it was clear that I should use the standard deduction, which greatly simplifies doing the taxes. Within a week of beginning my tax preparation, I had my federal taxes filed.
With the federal taxes done, I turned to my state taxes. My experience is that state tax forms tend to be more complicated and that the instructions tend to be more opaque, so I was expecting this to be a more difficult chore. There was no “Tax Guide for Seniors” to guide me. But as I looked over Maine’s 1040ME tax form and instructions, I was pleasantly surprised. Most of it was pretty straightforward, and I was happy to learn that Maine exempts the first $10,000 of pension income. There is also a special property tax credit for those with lower incomes which essentially refunds some of their property taxes. After a call to the state tax assistance line with one question, it took me about 2 hours to fill in all the forms online and file my taxes electronically. And because I had less than $25,000 in taxable income this year, all those deductions and credits left me getting a subsidy from the state.
I’ve never been one to look for a big refund on my taxes. When I was working, I had my withholding set so that I would usually get a small refund ($100-$200) on my federal taxes and owe some of that to the state. This year, I had no idea what my tax liability would look like, so I had taxes withheld when I took distributions from my retirement funds and IRA. I was being cautious because I didn’t want to trigger a situation where I owed enough at tax time this year that I would be required to do quarterly estimated taxes next year. The result of this caution is that I am now getting almost $2000 in refunds from the federal and state governments. Next year, I’ll try to calculate my withholding more finely so that I’m not giving the government a big interest-free loan.
This first experience with retiree taxes has left me feeling quite satisfied with myself. This is the earliest I’ve ever gotten my taxes done, and I now feel as though I have a handle on the specifics of taxes for those over 65. Moreover, doing my taxes has provided reassurance that I’m in good shape financially. All I have to do now is sit back and wait for those direct-deposit refunds to show up in my savings account.