Taxation

The total income-tax relief given older adults can be very important. The precise amount of the relief, however, depends on how income is received. In Tax Benefits for the Elderly (2000) Rudolph Penner presents a number of examples, loosely based on data from the Statistics of Income (U.S. Treasury, Internal Revenue Service). One example involves a retired couple age sixty-five or older with $67,372 in income (in 1998) who get 24 percent of their income from Social Security, 40 percent from pensions and annuities, 30 percent from interest and dividends, and 5 percent from earnings. In Hawaii, such a couple would pay about $5,500 less in taxes than a younger couple receiving the same total income from wages. The tax liability of the older couple is thus reduced by 36 percent, or by 8.1 percent of income. In South Carolina, the elderly couple would receive a tax cut of about $4,000, or 6.0 percent of income. In Georgia, the benefit is about $2,100, or 3.2 percent of income. None of the above figures count property tax concessions. Table 1 Selected Characteristics of State Income Tax Systems (Tax Year 1998) SOURCE: Author In all cases, the tax cut for older couples would be much lower if almost all income came from wages and interest and dividends.

For lower incomes, the percentage cut in the tax liability is usually higher, although the absolute value of the cut declines. Assuming $28,323 of income, with 37 percent derived from Social Security, 33 percent from pensions and annuities, 15 percent from interest and dividends, and 15 percent from earnings, the percentage tax cuts in Hawaii, Georgia, and South Carolina are 12.1 percent, 9.8 percent, and 9.2 percent, respectively. Because the percentage cut tends to grow at lower income levels, it can be said that the tax concessions given to elderly persons tend to be progressive. However, it must be reemphasized that they also tend to be erratic. A person who decides to work after the normal retirement age and who does not benefit from a tax-free pension will, in many states, receive much less of a tax break than a retired person with exactly the same income from Social Security and private pensions. Because people tend to retire earlier if they have a more generous pension, the tax concessions provided for retirement income undoubtedly encourage some to retire earlier than they would without the tax concession.