Tax and Financial Abuse Resources for Seniors
Check out this financial advice for seniors to learn how to lower your tax bill, avoid financial fraud and abuse and keep more of your hard-earned cash.
After decades of working, running a household and managing other responsibilities, it's time to enjoy the fruits of your labor. Whether you want to travel the world, spend time with grandchildren or simply relax and enjoy everything your neighborhood has to offer, you'll need money to cover your living expenses and have enough left over for leisure activities. The following financial advice for seniors focuses on reducing your tax burden, planning ahead for tax issues and avoiding scams, identity theft and other forms of financial fraud.
Tax Support for Seniors
If you have multiple investments and interest-earning bank accounts, filing your taxes can be complicated, especially if you have gains in some areas and losses in others. Fortunately, several organizations provide tax support for older adults.
Can Senior Citizens Get Their Taxes Done for Free?
The Tax Counseling for the Elderly Program offers free income tax preparation for seniors at all income levels. Volunteer counselors specialize in answering questions about pensions and other retirement accounts. If you earn no more than $56,000 per year, have a disability or speak limited English, you may also qualify for assistance from the Volunteer Income Tax Assistance program. VITA volunteers are available to answer questions, but they don't prepare your return for you.
For older adults, the American Institute of Certified Public Accountants is also a helpful resource when dealing with tax issues. The AICPA has an ElderCare task force composed of members from the United States and Canada. An accountant who chooses to provide ElderCare services offers counseling for some issues and direct services for others, which helps ensure that older adults have the support they need to live independently for as long as possible. CPAs who offer ElderCare services are knowledgeable about tax issues, long-term care alternatives and other topics of importance to seniors.
Saving Money on Your Tax Bill
There's no one-size-fits-all approach to tax planning. Several factors influence your tax situation, including your age, income level, number of dependents and marital status. Although no single approach is appropriate for every taxpayer, there are several things you can do to reduce your tax burden.
If you regularly give large gifts to your loved ones, reduce your tax bill by keeping the annual gift tax exclusion limit in mind. As of 2020, the annual exclusion amount is $15,000, which means you can give an individual up to $15,000 in cash or $15,000 worth of property without having to pay gift tax on it. If you exceed the limit, you'll owe gift tax on the transaction.
If you're still working, contributing to your 401(k) or 403(b) can help you save a sizable amount on your tax bill.1 Provided you don't exceed the annual contribution limit, putting money in one of these accounts will reduce your adjusted gross income on a dollar-for-dollar basis. That means if you make a $3,000 contribution, your AGI will go down by $3,000. If you don't have an employer-sponsored plan, contributions to a traditional IRA may also reduce your tax liability. Contributions to a Roth IRA don't have the same tax benefit, as they're made with money that has already been taxed.
Required Minimum Distributions
If you have an employer-sponsored retirement plan, such as a 401(k), 457(b) or profit-sharing plan, you must start taking required minimum distributions once you reach a certain age. For taxpayers who reach the age of 70 1/2 in 2020 or later, the first RMD must be withdrawn by April 1 following the year you turn 72.2 If you don't take the RMD, the IRS will tax the amount not withdrawn at a rate of 50%, which could put you in a higher tax bracket.3 Because the RMD is taxed as ordinary income, failure to take the required distribution could also cause your Social Security payments to become taxable.
In some cases, you can defer income from one tax year to the next, saving you money on your tax bill. This strategy is often used by consultants, freelancers and other individuals who work as independent contractors rather than W-2 employees. If you do $5,000 worth of work for a client in December, for example, you may want to hold off until the end of the month to send the invoice. This strategy might also work if you are an employee who receives an annual bonus. If your employer is willing to pay the bonus in January, it won't be taxable until you receive it, which could save you money for the current tax year.
Common Tax Issues for Retirees
Social Security Benefits
Depending on how much income you generate during retirement, you may have to pay income taxes on your Social Security benefits. The tax rate depends on your combined income and whether you file as an individual or jointly with a spouse. Combined income refers to your adjustable gross income combined with your taxable interest and half of your Social Security benefits.
If you file as an individual, you may have to pay tax on up to 50% of your Social Security benefits if your combined income is between $25,000 and $34,000.4 Up to 85% of your Social Security benefits may be taxable if you file as an individual and have a combined income of more than $34,000.5 For joint filers, up to 50% of your Social Security benefits may be taxable if you and your spouse have a combined income of $32,000 and $44,000.6 Up to 85% of your Social Security benefits may be taxable if you and your spouse have a combined income exceeding $44,000.7
Location-Specific Tax Issues
If you want to relocate when you retire, choosing a location carefully can help you save thousands of dollars in taxes. Before you move, investigate each state's tax situation thoroughly. Some states have no income tax, but they make up for it with high sales taxes or higher fees for government services. For example, Tennessee has no income tax, but the state's sales tax rate is 7%.8 When you account for local sales taxes, the total sales tax rate is close to 10% in some regions. Some states also have personal property taxes on cars, trucks, boats, recreational vehicles and other forms of movable property. This type of tax may be assessed annually or when the property transfers from one owner to another.9
Taxes on Tax-Deferred Retirement Accounts
Certain retirement accounts are considered "tax-deferred" because you don't pay income tax on your contributions or earnings until you start making withdrawals.10 They're not tax-free accounts, but they let you avoid paying taxes until you're ready to start taking distributions. One advantage of using a tax-deferred retirement account is that your taxable income may be lower when you're retired than it was when you were working; if so, you'll be in a lower tax bracket when it's time to pay taxes on your distributions. This isn't always the case, however, so it's important to work closely with an adviser who specializes in financial planning for seniors.
Because millions of seniors rely on Medicare to cover many of their medical expenses, a lot of financial advice for seniors relates to preventing Medicare fraud and recognizing this type of fraud when it occurs.
Common Types of Medicare Fraud and Abuse
Billing for Services Not Rendered
One of the most blatant forms of Medicare fraud is billing for services not rendered. This is when a provider submits a bill for a service that hasn't been provided to the Medicare beneficiary. For example, if a health care provider submits a Medicare claim for administering a cortisone injection, but the Medicare beneficiary never received such an injection, the provider has billed Medicare for services not rendered.
A variation on this type of fraud is when a provider performs a low-level service and bills Medicare for something much more expensive. When this happens, the biller may assign an inaccurate code to the service to increase the amount of the claim. For example, an unscrupulous provider may meet with a patient for five minutes, which should typically be classified as a low-complexity visit, and submit a claim for a high-complexity visit.11
Medically Unnecessary Services
To qualify for Medicare reimbursement, a medical service or health care item is supposed to be considered necessary and reasonable for the illness or injury being diagnosed and treated. If you break a bone, for example, a plain X-ray is usually enough to determine the location and severity of the break. An unscrupulous provider may perform an expensive CT scan or ank ju MRI instead, even if there's no indication that one of these tests is necessary. Providing services unrelated to an individual's symptoms or diagnosis is another example of Medicare fraud.12
The Anti-Kickback Statute prohibits health care providers from accepting or offering kickbacks in exchange for referrals. Although you might think of cash payments when you hear the term "kickback," this statute also prohibits health care providers from accepting free meals or accommodations, reduced rent, rent waivers or any other item of value in exchange for referrals.13 For example, if a psychiatrist provides rent-free office space to a primary care provider in exchange for referrals, both physicians are in violation of the law.
Medicare has been criticized for failing to provide enough oversight related to its Part D prescription program.14 Unscrupulous practitioners commit prescription fraud when they prescribe unnecessary medications or prescribe expensive specialty medications when low-cost medications would have been appropriate. Pharmacists may also commit prescription fraud by billing for brand-name drugs even though they've dispensed low-cost generics, billing for prescriptions that weren't filled and dispensing prescriptions in a way that allows them to maximize their dispensing fees.
Preventing Medicare Fraud
As a Medicare beneficiary, there are several things you can do to prevent fraud and abuse. Follow this financial advice for seniors to reduce the risk that your personal information will be used for fraudulent purposes.
- Be careful about sharing your Social Security number and Medicare number.
- Keep good records. Write down the date of every medical appointment and a short summary of what happened.15 If you ever receive a bill for services you don't remember receiving, you may be able to use your notes to support your claim that you were billed in error.
- Don't ask your doctor to provide services you don't need.
- Avoid having anyone other than known health care providers review your medical records. If someone reviews your medical record and recommends a new service, ask your doctor whether the service is medically necessary.
How to Identify Medicare Fraud
Paying close attention to your Medicare statements and any bills you receive from health care providers can help you spot Medicare fraud. One way to identify fraudulent charges is to compare service dates with the appointments recorded on your calendar. If you receive a statement with a service date that doesn't match your records, contact the provider to determine if the claim was submitted in error. When you receive a statement, look it over right away. The sooner you spot fraud, the sooner you can report it and have it investigated. If you have to make a payment while you're in a provider's office, check your receipt carefully. Ask questions if there's anything on your receipt you don't understand.16
Reporting Medicare Fraud
If you believe one of your health care providers has engaged in Medicare fraud, you can make a report by calling (800) 633-4227. For beneficiaries with Medicare Advantage Plans, the Medicare Drug Integrity Contractor also accepts reports of suspected fraud. Call (800) 772-3379 to file a report. Before reporting suspected fraud, take a few minutes to collect the provider's name, the approved payment amount and the date on the statement/notice.17
Financial Fraud and Abuse
Elder financial abuse refers to the unauthorized or improper use of a senior's resources for profit or personal gain. Although some cases of elder financial abuse involve complete strangers scamming older adults out of their hard-earned money, this type of abuse is often perpetrated by trusted individuals. Family members, paid caregivers, attorneys, financial advisers, neighbors, friends and even bank employees can commit elder financial abuse by stealing cash, forging checks or misusing other resources.18
How Common Is Elder Financial Abuse?
Although elder financial abuse is likely under-reported, the National Council on Aging estimates that fraud and financial exploitation cost older adults anywhere between $2.9 billion to $36.5 billion per year.19
In many cases, an abuser takes advantage of his or her personal connection to a senior citizen. Family members, home-health workers and close friends may visit regularly, giving them direct access to a senior's checkbook, credit cards and cash reserves. Loved ones who have been given financial power of authority can abuse this power by making financial decisions that serve their own interests instead of protecting the interests of the older adult. Someone who has power of attorney over an older adult has the legal authority to make financial decisions on that person's behalf.20
Caregivers may also withhold care or make threats of violence against an older adult in exchange for money or other financial resources. For example, a caregiver may refuse to prepare a meal or help with toileting unless the older adult hands over cash or makes the caregiver an authorized user on a credit account.
If a family member, a friend, a caregiver or any other person known to you commits elder financial abuse, contact your local law-enforcement agency to file a report. Before you make the call, gather as much as information as possible about the abuse, including bank statements, copies of canceled checks, receipts, loan documents or credit card statements.
Older adults are often targeted by scammers who talk them into parting with their hard-earned money by impersonating government officials, selling goods that don't exist or taking deposits for plumbing, lawn care or construction services and then never following through to complete the jobs. According to the National Council on Aging, older adults are targeted for these scams because there's a perception that older people must have a lot of money saved after working their whole lives.21 Older adults may also be too embarrassed to tell anybody what happened, making it more likely that scammers will get away with their crimes.
Because most Americans 65 and older qualify for Medicare coverage, Medicare scams are common. Some scammers pose as Medicare representatives and ask older adults to provide their Social Security numbers, telephone numbers, addresses and other personal information that can be used to commit identity theft.22 Another common Medicare scam has the scammers operating mobile medical clinics. Seniors visit these clinics thinking they're receiving services from qualified health professionals, but that's not the case. The scammers make money by billing Medicare for the fake services.
Many funeral homes now offer prepaid packages to ensure that your funeral is conducted according to your wishes and spare your loved ones the burden of trying to guess what you'd want. In many cases, these packages are legitimate, but some scammers have taken advantage of lax state laws to con thousands of people. One group of scammers victimized nearly 100,000 individuals by taking money for prepaid funeral arrangements and not using the money as intended.23 The perpetrators were supposed to deposit the money with reputable financial institutions or use it to purchase life-insurance policies for customers. Instead, they altered the applications to their benefit. They used the money to pay existing claims, make risky investments and improve their own financial circumstances.24
Unscrupulous people in the funeral industry may also try to talk you into spending more than necessary if you decide to plan your funeral in advance. For example, a common scam is to tell customers they need to purchase an expensive casket even if they're being cremated. An inexpensive cardboard casket can be used for cremation, so there's no need to purchase a display casket that costs thousands of dollars.
Wealthy retirees are often targeted for investment schemes promising large returns for little effort. One example is the Ponzi scheme, which uses funds provided by new investors to pay back people who invested earlier. If you manage to produce a return on your investment, the funds you receive will come from someone who has been swindled into investing. The largest Ponzi scheme in U.S. history, run by Bernard Madoff, cost investors more than $50 billion.25
Binary options are also marketed to older adults as an "easy" way to make money. A binary option is an all-or-nothing proposition that ties your potential return to whether or not something happens in the future. For example, you might purchase a binary option contract that costs $100 and says you'll earn a 30% return if the company's stock price is above $10 per share when the contract expires. If the company's stock price is at less than $10 per share, you'll lose your money.26
IRS and Social Security Scams
Some of the most brazen scammers profit by posing as employees of government agencies. They use the authority of these agencies to scare older adults into sharing their Social Security numbers and other personal information. In some cases, they collect money by claiming that their victims owe back taxes or fines. Two of the most common scams involve people posing as employees of the Social Security Administration or Internal Revenue Service.
When scammers impersonate SSA employees, they may claim that your Social Security number has been suspended or that you have to pay back some of your Social Security benefits. They may ask you to pay with a wire transfer, prepaid debit card or gift card.27 Scammers posing as IRS agents may threaten to have you arrested unless you make an immediate payment to resolve a bogus tax issue. Like SSA scammers, they may ask you to pay them with prepaid debit cards, wire transfers or gift cards.28
To avoid falling prey to one of these scams, follow this financial advice for seniors:
- Don't give the caller any personally identifying information or make any payments. If you do owe one of these agencies money, they'll contact you in writing and give you time to respond. You may also have the opportunity to submit an appeal.
- If the caller threatens you, hang up immediately.
- Report the call to the appropriate agency. Social Security scams can be reported to the Office of the Inspector General, and IRS scams should be reported to the Treasury Inspector General for Tax Administration.29/30 Other scams can be reported to the Federal Trade Commission via an online complaint form.31
Telemarketing scams are also common, as telemarketers assume that retirees will be home to take their calls. Loneliness and isolation can also make some older adults more vulnerable to these scams, making them ideal targets for unscrupulous telemarketers.
One common type of telemarketing scam involves collecting donations for charities that don't exist.32 You may be asked to donate money to a police benevolent association, disaster-relief fund or charity that supposedly helps cover medical expenses for people with cancer or another serious illness. Instead of using your money to help others, the scammer pockets it.
Another telemarketing scam aimed at older adults involves asking for money on behalf of a child or grandchild who is seriously ill or in jail.33 Some scammers claim that a loved one has been in an accident and needs money to cover medical expenses while others claim that the loved one has been arrested and needs money for bail.
In a scam known as a pigeon drop, a telemarketer calls you and offers to share a large amount of money with you if you make a payment that will cover banking fees or other payment-related expenses.34 The scammer may be working with an accomplice who poses as a banker or attorney to make the claim seem more legitimate.
The following financial advice for seniors can help you protect yourself against telemarketing scams:
- Do business with people you know and trust. If you have to buy something that's only offered by a company you have no experience with, do your research. Ask friends and family members for referrals, read online reviews and check your local public records to determine if the company has been sued for doing shoddy work or taking money and never delivering the promised goods or services.
- Don't make charitable donations over the phone.
- If you're hiring a contractor, electrician or other service provider, check to see if the provider has a valid license or certification.
- Don't give in to high-pressure sales tactics. If you're interested in the product or service, take down the salesperson's contact information and tell them you need time to discuss the purchase with a family member or trusted friend.
Identity theft refers to the use of your personal information without your permission. Once identity thieves have your Social Security number, driver's license number and other personal information, they can use it to access your bank account, apply for loans and credit cards in your name, collect your tax refund or use your name to obtain medical care.35
Indications of Identity Theft
If someone has stolen your identity, you may start to notice any or all of the following:
- Unexplained charges on your financial statements
- Calls from debt collectors regarding debts that aren't yours
- Bills from health care providers for services you didn't use
- Unfamiliar accounts listed on your credit reports
- Refusal of your personal checks by merchants or banks
- Rejected medical claims because your insurance company believes you've reached your annual benefit limit
You may also be a victim of identity theft if you receive W-2 or 1099 forms from unfamiliar companies, if the IRS informs you that more than one return has been filed under your name or if you're notified that your data was compromised in a breach.36
Financial Advice for Seniors Who've Had Their Identities Stolen
Once you realize your identity has been stolen, there are several steps you can take to mitigate the financial damage and get your life back. The right steps to take depend on the information that was stolen. If someone stole your Social Security number, you can do the following:
- Order copies of your credit reports from Annual Credit Report. Check each report for accounts you don't recognize.37
- File your tax return as soon as possible each year. If you file early, the IRS may accept your return before the identity thief can file one in your name.
- Freeze your credit so the thief can't keep opening new accounts in your name.
- File a police report.
If you know that someone has your debit card or credit card number, take the following steps:
- Cancel your card immediately.
- File a claim with the bank for any fraudulent transactions.
- Keep monitoring your statements for unusual charges you didn't authorize.
- Order copies of your credit reports from Annual Credit Report.38
- File a police report.