Almost every state that levies an income tax allows 2020 tax relief for seniors, elderly and disabled citizens over age 65, unavailable to other taxpayers.
Most states also provide special property tax breaks to the elderly.
Unfortunately, too many of these breaks are poorly-targeted, unsustainable, and unfair.
This policy brief surveys federal and state approaches to reducing taxes for older adults and suggests options for designing less costly and better targeted tax breaks.
If you are 65 or over as of 2019, you can fill out Form 1040SR for tax year 2019.
You are entitled to an additional $1300 in standard deductions.
As a result the standard deduction for seniors is $13,000 for the tax year 2019, the first year that you can use the form 1040SR.
Federal tax law provides two substantial tax breaks to elderly taxpayers:
Most states that levy income taxes go beyond the tax preferences for the elderly inherited from federal income tax rules and allow special elderly-only tax breaks of their own. Many states also provide property tax breaks available only to homeowners (and in some cases renters) over 65. For a list of tax breaks by state, see the chart at the end of the brief.
The goal of reducing taxes for elderly taxpayers is a politically attractive, yet costly, one—and lawmakers in virtually every state have taken steps to achieve it.
Providing such tax breaks requires confronting several important design issues that can make the difference between an effective policy and a poorly-targeted and expensive tax giveaway.
First and foremost, there is the question of who should benefit.
In many cases, wealthy elderly taxpayers reap the biggest benefits from state income tax breaks designed for older adults.
This is especially true in states that fully exempt Social Security or pension income from the tax base.
Low- and fixed-income elderly taxpayers are already shielded from owing income taxes on Social Security if states follow the federal rules; if states choose to exempt all Social Security benefits, they spend a lot of money offering a tax break to those who do not need it.
In Rhode Island for example, more than half of the benefit of fully exempting Social Security from the state’s income tax flows to the richest 20 percent of taxpayers.
Exempting all retirement income is even less targeted with two-thirds or more of the break going to the top 20 percent in Rhode Island.
Given the costs of poorly targeted tax breaks, some states allow elderly exemptions only for low-income seniors.
For example, Montana exempts up to $3,980 of pension income, and the exemption is gradually reduced to zero for single taxpayers with incomes over $35,180 ($37,170 for joint filers).
Most states, however, extend elderly tax breaks to seniors at all income levels.
Imposing income limits helps to target the benefits of pension and other retiree tax breaks to truly needy seniors.
Other considerations include:
Poorly targeted tax breaks for the elderly are a costly commitment for many states and long-term demographic changes threaten to make these tax breaks unaffordable in the long-run.
Older adults are the fastest growing age demographic in the country.
According to the US Census, the population of adults 55 and older grew by more than 30 percent between 2000 and 2010, while the population of those under 55 grew only by 4 percent.
This trend is even starker in some states, where the population of older adults has grown by as much as 50 percent in just a decade.
By 2030, almost 20 percent of the US population will be over 65. Over time, this demographic shift will mean that a shrinking pool of workers will be forced to fund tax breaks for an expanding pool of retirees—heightening the need to target these tax breaks appropriately to minimize their cost.
Moreover, while poverty has often been associated with advanced age, a 2014 US Census report found that Americans over 65 are less likely to be poor than people in their prime working years, further exacerbating the mismatch between the tax breaks offered and needs within the population.
Since the 1990s, the poverty rate for the elderly has been steady at 10 percent, recently decreasing to 8.8 percent in 2014, while the overall share of Americans living in poverty has risen to 13.5 percent.
Trends such as rising income inequality and single-parent household formation have eroded the middle class, further weakening the pool of workers that finance tax breaks for the elderly.
Few demographic groups receive more attention from state lawmakers than fixed-income seniors.
There is a virtual consensus among elected officials that retirees should not be “taxed out of their homes,” for example.
Yet state income tax breaks for elderly taxpayers typically grant the lion’s share of their benefits to better-off elderly taxpayers.
These poorly targeted tax breaks shift the cost of funding public services towards non-elderly taxpayers, many of whom are worse off than the seniors benefiting from the tax breaks.
Retooling elderly tax breaks to better target the neediest seniors will help states, in the long run, to achieve a fairer and more sustainable tax system.
See the accompanying chart for a state-by-state overview of tax breaks for elderly taxpayers as well as age demographic trends.
Curated from ITEP.org
Rural Money Resource: IRS Form 1040-SR, U.S. Tax Return for Seniors