Retirees on Fixed Incomes Facing Back Taxes Can Use These Resources
In retirement, living on Social Security with limited savings can be challenging, but it's a common problem. In fact, 26.5 million people — approximately 44% of Social Security recipients — said Social Security made up three-quarters of their income, according to the Pew Research Center.
With the rising cost of living, your budget may already be strained. If an unexpected tax bill comes in, it's just another layer of heavy stress.
If you have a limited income in retirement and find out you owe back taxes, there are some options available to you that could provide some relief. From payment plans to penalty abatement, here's what you need to know about managing back taxes.
Key Takeaways
- Low-income retirees may qualify for payment plans, an offer in compromise (OIC) or penalty abatement.
- Free tax counseling and tax filing services are available to seniors.
- Going forward, adjusting your withholding or making estimated tax payments can prevent future surprise tax bills.
Why Retirees May Fall Behind on Their Taxes
After years of working, you may assume that taxes become simpler once you retire. However, that's not always the case. Retirees face some unique tax issues that can lead to unexpected tax bills:
Required Minimum Distributions (RMDs)
If you have a traditional individual retirement account (IRA), SEP IRA, SIMPLE IRA, or 401(k), these retirement accounts are subject to RMDs, meaning you must withdraw at least a certain amount each year.
When you withdraw money from these accounts, the withdrawals are treated as taxable income. If you weren't planning on taking a withdrawal, the RMD and resulting taxes may catch you off guard.
Retirement Account Withdrawals
In retirement, you're likely on Medicare. While Medicare covers a significant portion of your medical care, it doesn't cover everything. You either need additional coverage or must pay out of pocket for prescriptions, long-term care or custodial care, and holistic treatments. To cover the cost, you may withdraw money from your retirement accounts.
The withdrawal could push you into a higher tax bracket, resulting in a larger tax bill.
Miscalculating Tax Withholding
During your time working, your employer withheld taxes from your paycheck to cover the necessary taxes. In retirement, you have to specifically request that taxes are withheld from your Social Security benefits, pension, or investment income. Otherwise, you won't pay any taxes, and will owe a large sum at tax time.
What Happens If You Don't Pay Your Back Taxes
If you get a letter from the IRS that says you owe money, you may feel overwhelmed. Ignoring that letter is the worst thing you can do. The longer you put off handling it, the worse it gets, because the IRS has a structured process for handling unpaid taxes:
- IRS penalties: If you didn't pay your tax bill, the IRS will add failure-to-pay penalties to your account. Over time, these penalties can add up.
- Interest: In addition to penalties, the IRS charges interest on unpaid taxes from the date the payment was originally due, and the interest compounds.
- Collection actions: The IRS can file a Federal Tax Lien on public records, limiting your ability to qualify for credit. The IRS can also seize assets like your wages or bank account balances. And they can even seize your property, including real estate or vehicles.
- Social Security benefit impact: Through a federal payment levy, the IRS can garnish up to 15% of your Social Security benefits to repay your tax debt.
The consequences of owing back taxes in retirement are severe, so it's important to take action right away.
How Retirees Can Get Help With Back Taxes
If you're in retirement and are facing a surprise tax bill, there are some steps you can take to get some relief:
Installment Plans
Depending on how much you owe, you may be eligible for a payment plan. You can make monthly payments over several months or even years, making your debt more manageable, but you'll still owe the penalties and interest charges that accrue.
Apply for an IRS payment plan online.
Offer in Compromise (OIC)
The IRS reviews your income and expenses to determine your ability to repay your debt, but you may qualify for a reduced tax bill and get a fresh start. If so, you can pay a much lower amount and be out of debt sooner. As TaxRise notes, the payment is a lump sum — so be ready for a one-time amount you’ll have to pay.
You can check your eligibility and apply for OIC online.
Penalty Abatement
If this is your first time facing tax trouble, or if you have extenuating circumstances for falling behind on your taxes, you can request a penalty abatement. If you qualify, the IRS will remove or reduce the penalties added to your accounts. You'll still have to pay the original amount owed and interest, but the reduction of penalties can significantly reduce your overall total.
Request a penalty abatement by following the instructions on the IRS notice you received in the mail.
Currently Not Collectible Status
If paying anything toward your back taxes would prevent you from affording essentials — like your rent or electric bill — you can request that the IRS place your account in "Currently Not Collectible" status. This status pauses tax collection efforts, but interest and penalties continue to build.
To request a postponement of the collections process, contact the IRS at 800-829-1050.
Tips to Prevent Future Problems
Once you have a plan in place for managing the taxes you owe, start thinking about proactive steps to prevent the same problem from happening in the future:
- Adjust withholding: Contact your pensions provider or the Social Security Administration to withhold taxes (or increase your withholding) from your monthly payments.
- Make estimated quarterly payments: If you receive other income, such as from selling collectibles or from a rental property, consider making estimated tax payments each quarter.
- Work with a tax professional: A tax professional can ensure you're withholding the right amount from your benefits and retirement accounts and plan for future taxes.
- Get free help: You can get free tax assistance through the Tax Counseling for the Elderly program if you're 60 or older.
Real solutions for tax debt relief!
FAQs
What is the new $6,000 deduction for seniors?
The One Big Beautiful Bill (OBBB) created an enhanced deduction for seniors. Effective 2025 through 2028, individuals who are 65 or older can claim an additional $6,000 deduction above and beyond the standard deduction. However, income limits apply.
Can seniors file their taxes for free?
Low-income seniors can file their taxes for free through the Tax Counseling for the Elderly and Volunteer Income Tax Assistance (VITA) programs. You can find help near you through the IRS' free tax preparation page.
Are Social Security benefits taxable?
Yes, monthly retirement Social Security benefits may be taxable as income. The portion that is taxable depends on your filing status and income. If you're single and your income exceeds $25,000, you'll pay income taxes on up to 85% of your Social Security benefits.