There are lots of benefits to being retired, like having the time and freedom to pursue interests you couldn’t while you were working. In addition, the federal government offers some big tax benefits to retirees and senior Americans.
Here are 5 retiree and senior tax breaks you might be able to benefit from:
- A bigger standard deduction — Once you turn 65, you can take a larger standard deduction than you could before reaching this age milestone. For tax year 2020, the standard deduction amounts for those 65 and over are as follows:
- Married couples filing jointly and qualifying widows or widowers (when one spouse is 65 or over): $26,100
- Married couples filing jointly and qualifying widows or widowers (when both spouses are 65 or over): $27,400
- Singles or married couples filing separately: $14,050
- Heads of household: $20,300
Taking the standard deduction is more beneficial than itemizing deductions for many people since the Tax Cuts and Jobs Act raised the standard deduction across the board. Keep in mind that there are certain scenarios in which the standard deduction is limited or unavailable for those 65 and over. The first is if another taxpayer claims you as a dependent, and the second is if you’re married filing separately and your spouse itemizes deductions.
- Exclusion of capital gains from selling a primary residence — If you decide to downsize to a smaller home or move to a new state when you retire, you could save big money with this tax break. If you’ve lived in your home for at least two of the five preceding years, you can exclude up to $250,000 in capital gains from the sale of your home from federal income taxes. If you’re married and file jointly, this amount doubles to $500,000.
Keep in mind that this exclusion is only allowed once every two years. In other words, you won’t qualify for the exclusion if you excluded from taxes the gain from the sale of another home during the two-year period prior to your current home’s sale. Consultant IRS Publication 523 for more details on the home sale exclusion rule.
- The ability to deduct some medical expenses — This tax break could come in handy if you encounter higher medical expenses after you retire. Once your medical expenses exceed 7.5% of your adjusted gross income (AGI) — which is down from 10% of AGI last year — you can deduct them if you itemize deductions on your federal income tax return. You’ll figure and claim your deduction amount using Schedule A, Form 1040.
A wide range of medical expenses qualify for this deduction, including dental expenses as well as expenses incurred for the diagnoses, cure, mitigation, treatment or prevention of disease. Keep in mind that you must reduce your deduction by the amount of any medical reimbursements you receive, regardless of whether you are reimbursed directly or the reimbursement is made on your behalf to your doctor or hospital.
- The Credit for the Elderly or the Disabled — This tax credit is designed to help low-income or disabled seniors who are 65 years of age or over. To meet the disability requirement, you must meet all three of these criteria:
- You were permanently and totally disabled before you retired.
- You received taxable disability income during the year.
- You are younger than your employer’s mandatory retirement age before the beginning of the tax year.
The credit amount ranges from $3,750 to $7,500, depending on your filing status. The credit is intended mainly for retirees and seniors who are living wholly or primarily on Social Security benefits.
- The ability to make a qualified charitable distribution (QCD) — This strategy is especially beneficial if you have to take required minimum distributions (RMDs) from a traditional IRA but don’t need the money to meet your living expenses. Instead of taking the RMD, you can donate up to $100,000 of IRA assets per year to a qualified charity and deduct the donation if you itemize using Schedule A. This amount will count toward your annual RMD.
Since QCDs aren’t considered taxable income by the IRS, no taxes are due on the distributions. Also, the amount of the QCD is excluded from your gross income for the year. This is important because a number of tax breaks and credits are phased out once you reach certain AGI levels, including eligibility to open a Roth IRA. Note that eligibility to take a QCD doesn’t begin until age 70½.
Please contact us if you have any questions about these strategies. And be sure to speak with a qualified tax advisor about your specific situation.