Tax Deductions for Seniors
What are the Tax Deductions for Seniors?
As we get older, our financial situation often changes. We may be working fewer hours or no longer part of the workforce. This can make it difficult to keep up with our taxes. However, there are a number of tax deductions that can help seniors reduce their tax bills. For example, seniors can deduct their medical expenses, charitable donations, and investment losses.
Here are some of the best ways to get tax deductions for retired seniors.
Programs to Get Tax Deductions for Senior Citizen
Smart Ways to Receive Tax Deductions for Retired Seniors
FAQs About Tax Benefits for Seniors
Programs to Get Tax Deductions for Senior Citizens
Retirement Plan Contributions
If you're like most people, you know that saving for retirement is important. But did you know that there are tax breaks available to help you boost your savings? One way to get tax deductions for seniors is to make contributions to a retirement plan.
Contributions to a 401(k) are limited to a set amount per year. In 2022, for those 50 and older, you can put in $27,000 per year. But this assumes that you’re still working, and your employer participates in a 401(k) plan. If this doesn’t apply to you, you may be able to contribute an extra $1,000 per year to a traditional IRA or Roth IRA. Check with your accountant to see what will work for your personal situation.
IRA Contributions
Individual Retirement Accounts (IRAs) are one of the most popular retirement account options. One of the primary benefits of an IRA is that contributions are tax-deductible. This means that, depending on your tax bracket, you may be able to reduce your taxable income by making IRA contributions. Additionally, growth in an IRA is tax-deferred, which means that you won't have to pay taxes on any earnings until you withdraw the money from the account (at which point you will likely be in a lower tax bracket).
401K Catch-up Contributions
If you're age 50 or older, you're eligible to make catch-up contributions to a 401(k) account. The catch-up contribution limit for 2020 is $6,500 (compared to the $19,500 contribution limit for those under the age of 50). This allows seniors to "catch up" on their retirement savings if they haven't been able to save as much as they would've liked throughout their working years.
SIMPLE IRA or SIMPLE 401(k)
The SIMPLE (Savings Incentive Match Plan for Employees) IRA and SIMPLE 401(k) are two retirement account options designed for small businesses and their employees.
For 2020, the contribution limit for SIMPLE IRAs is $13,500 (compared to the $19,500 limit for traditional IRAs). The SIMPLE 401(k) contribution limits are even higher, at $26,000 (or $32,000 if age 50 or older). These increased limits make these types of accounts especially beneficial for seniors who want to accelerate their retirement savings.
Higher HSA Contribution Limits
Another way for retired seniors to get a tax deduction is through a Health Savings Account.
If you have a high-deductible health insurance plan, you may be eligible to open a Health Savings Account (HSA). HSAs are tax-advantaged accounts that can be used to cover healthcare expenses in retirement. One of the benefits of an HSA is that contributions are tax-deductible. Additionally, growth in an HSA is tax-deferred, and withdrawals are tax-free if used for qualified healthcare expenses.
For 2020, the contribution limit for an HSA is $3,550 for individuals and $7,100 for families. However, those age 55 or older can make catch-up contributions of an additional $1,000 per year. This makes HSAs a great way for seniors to save on healthcare costs in retirement.
Higher Standard Deductions
If you take a standard deduction, you’ll be able to deduct more after 65. The standard deduction amount is higher for people over 65 or blind. It is also higher if you’re unmarried, and not a surviving spouse.
Higher Tax Filing Thresholds
The tax filing thresholds are the income levels at which you're required to file a tax return. For seniors, the tax filing thresholds are generally higher than for younger taxpayers. This means that income tax breaks for seniors may be possible provided you do not claim certain types of income (such as interest and dividends) on their tax returns.
Tax Credit for the Elderly or Disabled
You may be eligible for tax benefits for seniors if you're age 65 or older, or you're retired with permanent and total disability. The credit is worth a maximum of $3,750 for taxpayers who are married and filing jointly, and $1,875 for all other taxpayers. To qualify for the credit, you must have income from sources other than Social Security benefits. Additionally, your modified adjusted gross income must be below certain limits.
Property Tax Exemptions
Some states offer property tax breaks for senior citizens. These exemptions can reduce the amount of property taxes you owe, and they may even allow you to keep your home if you're unable to pay your property taxes. To qualify for a property tax exemption, you must meet certain age and residency requirements. You may also need to meet income and asset limits.
Medical Expense Deductions
Medical expenses can drain a hole through your savings, but they can help increase tax deductions for senior citizens. If you itemize, you may be able to get some medical expenses tax deductions for seniors. However, this applies only to the amount in excess of 7.5% of your adjusted gross income.
Also, if you’ve recently purchased long-term care insurance, you may be able to add to the premiums in 2020. The older you are, the more you can deduct from your taxes in retirement. Check with your accountant to explore options.
Business Deductions for the Self-Employed
Many seniors and retirees are running their own businesses or starting new ventures. Business income and necessary reasonable expenses to do your business may be deductible. You may want to talk with your tax advisor or consult Nolo’s site for more insights into Business Tax & Deductions.
Qualified Charitable Distributions
As a retiree, you may be taking required minimum distributions (RMDs) from your traditional IRA. These RMDs are taxed as ordinary income. However, you can lessen the tax payables on your RMDs by making a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from your IRA to a qualified charity. The QCD can satisfy all or part of your RMD for the year, and it isn’t included in your taxable income.
There are some restrictions on QCDs. For instance, you must be age 70½ or older to make a QCD. Additionally, the distribution must go directly from your IRA to the charity. You cannot receive the distribution first and then donate it to the charity.
Charitable Contributions
In addition to QCDs, senior citizens can also get tax deductions on charitable contributions. To deduct a charitable contribution, you must itemize your deductions. The deduction is limited to 60% of your adjusted gross income for cash donations, and 30% of your adjusted gross income for non-cash donations.
Mortgage Interest Deductions
If you're a senior citizen and you have a mortgage, you may be able to deduct the interest you pay on your mortgage from your taxes. The deduction is limited to $750,000 of mortgage debt for married couples filing jointly and $375,000 for all other taxpayers.
Sale of Home
If you’ve been dreaming of downsizing and selling your long-time home, there are tax benefits. The IRS lets you exclude from your income up to $250,000 of capital gains on the sale of your home. If you’re single. If you’re married, the exclusion rises to $500,000.
There are a number of conditions to qualify for this tax benefit for seniors such as:
- The house has to have been your primary residence
- You must have owned it for at least 2 years
- You have to have lived in the house 2 of the 5 years before the sale
- You haven’t excluded a capital gain from a home sale in the past 2 years
Smart Ways to Receive Tax Deductions for Retired Seniors
1. Living In a Tax-Friendly State
One of the best strategies for saving taxes on retirement income is based on where you live. The choice is yours to live in or move to a tax-friendly state.
Investopedia offers insights into tax strategies for your retirement income. Seven states have no income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In 2021, Tennessee will join the group.
States can’t tax residents on retirement benefits earned in another state. That means that if you earn a pension in New York and relocate to Florida or Texas, this income would not be subject to state taxes.
Some states have special breaks for retirement income and or low-income taxes. These are important considerations for looking at maximizing your income in later years.
2. Being Strategic About Social Security Benefits
If your situation affords the possibility, consider deferring benefits until age 70. You’ll earn additional credits to boost your monthly benefits at that time. Plus, you won’t have to pay taxes now on the benefits.
3. Reassessing Your Investments
You might want to change your investment holdings in retirement. Look for moves that help you preserve principal and save on taxes.
Interest from municipal bonds is free from federal income tax. However, the interest may affect the tax on Social Security benefits.
If you receive stock dividends, they are taxed at more favorable rates than ordinary income. This varies depending on your taxable income and may be 0, 15%, or 20%.
Use losses to offset capital gains. You may be able to reduce or eliminate taxes on the gains. Check-in with your financial advisor or tax consultant to use losses to offset gains, and possibly carry these forward.
4. Reducing Interest on a Home Loan
You may be able to claim a deduction for interest paid on a home loan if you're 60 or over. The loan must have been used to purchase your home.
To claim the deduction, you’ll need to complete a form and submit it to the tax office. The deduction can be claimed as a lump sum or as a reduced monthly amount.
If you're claiming the deduction as a lump sum, you'll need to provide proof of interest paid. If you're claiming the deduction as a reduced monthly amount, you won't need to provide proof of interest paid.
5. Lower Your Rent
Tax deductions are also given to seniors who are currently renting their homes. This deduction can help to offset the cost of your rent, which can be a significant expense for seniors on a fixed income.
To qualify, you must be aged 60 or over and your annual income must be less than $22,000. The deduction is calculated based on the number of days you've rented your home, so if you move around frequently, you may not be able to claim the full amount.
However, even if you can only claim a partial deduction, it's still worth doing because it can reduce your taxable income and potentially lower your overall tax bill.
FAQs About Tax Benefits for Seniors
Can I deduct from my medical expenses?
If you itemize your deductions, you may be able to deduct some of your medical and dental expenses. To qualify, your expenses must exceed 7.5% of your adjusted gross income. Additionally, you can only deduct the portion of your medical expenses that exceeds this threshold. So, if your adjusted gross income (AGI) is $50,000 and your total medical expenses are $5,000, you can only deduct $500 ($5,000 - $4,750).
What about long-term care insurance?
Premiums that you pay for long-term care insurance may be deducted as a medical expense. However, there are limits on the amount you can deduct. For example, if you're age 40 or younger, you can only deduct up to $410 per year. The deduction limit increases to $790 if you're age 41 to 50, and it increases again to $1,580 if you're age 51 or older.
What other tax deductions for retired seniors might I be eligible for?
As a senior citizen, you may also be eligible for certain energy-related tax credits. For example, the Nonbusiness Energy Property Credit offers a credit of up to 10% of the cost of certain energy-efficient improvements to your home. These improvements include things like caulking and weather-stripping, insulation, and energy-efficient windows and doors.
There's also the Residential Energy Efficiency Property Credit, which offers a credit of up to 30% of the cost of installing solar panels or solar hot water heaters. You may also be able to take this credit for fuel cells and microturbines.
What if I don't itemize my deductions?
Even if you don't itemize your deductions, you may still be eligible for certain tax breaks as a senior citizen. For example, if you're at least 65 years old or blind, you may be able to take an increased standard deduction on your federal income tax return. Consult with a tax professional or accountant to learn more about which deductions and credits you may be eligible for as a senior citizen.
Assistance Club Summary
The big idea: Take advantage of tax benefits as you get older.
With a diligent approach, you can stay on top of choices, decisions, and strategic moves. Be sure to talk with your financial advisor and tax accountant. These professionals may be able to offer insights that give you benefits you may have overlooked.