Everyone wants to keep more of their hard-earned money. Luckily for seniors, many of whom are on a fixed income, there are several ways for them to save on taxes. With one out of three seniors aged 70-79 having saved less than $100,000 for retirement1, every deduction counts.
A good way to make sure you aren't missing out on deductions is to get professional guidance. There are free tax preparation services available to seniors through the IRS and AARP. Also, those with income under $69,000 per year can file online for free using one of several tax software providers. These online providers and IRS certified volunteers can answer questions about senior tax perks like the ones below.
When You Turn 50
Larger IRA Contributions
Those over the age of 50 can contribute $1,000 more to their IRA, making the maximum contribution for the year $7,0005. For a traditional IRA, these contributions act as a tax deduction. Also, once you reach 59½, you no longer have to pay an early withdrawal penalty for these funds.
401K Catch-up Contributions
Though not many take advantage of this perk, those over 50 can contribute an additional $6,500 to a 401K for 2020, bringing the total allowable contributions for the year to $26,000. Contributions to traditional 401Ks are pre-tax dollars, lowering your taxable income while helping save for retirement.
When You Turn 55
Higher HSA Contribution
Those 55 and older can contribute $1,000 more to their HSA than younger people as a “catch-up” opportunity. These contributions are tax-exempt and can be used for most medical expenses. There are no income qualifications for an HSA, though you must be enrolled in a high deductible health insurance plan6.
When You Turn 65
Higher Standard Deductions
Those over 65 get their taxable incomes lowered with a larger standard deduction. Married couples filing jointly can add $1,300 per person over 65 to their deduction. Since over 90%2 of people take the standard deduction instead of itemizing, this is a deduction almost everyone can take advantage of.
Higher Tax Filing Threshold
The minimum income that triggers a need to file a tax return at all is higher for those 65 and older. A single person over 65 would only need to file a return if his/her income was over $13,8507. For a couple of both over 65 filings jointly, the threshold is $25,700.
Tax Credit for the Elderly or Disabled
This tax credit directly lowers the tax bill by between $3,750 and $7,500 for those who qualify. People over 65 can qualify if they meet income restrictions. For someone filing on their own, income must be less than $17,500 and total non-taxable social security benefits below $5,0004, but there are different limits for different filing statuses. People who have retired on permanent disability may also qualify for the tax credit. This tax credit is difficult to qualify for and can be confusing. To see if you qualify, go to the IRS website and use their online tool3.
Property Tax Exemptions
Typically applied to those over 65, many states and cities give seniors special exemptions on the value of their homes. These exemptions vary depending on where you live, but the property needs to be your place of residence, and many places stipulate how long you need to have lived there. The exemption for those over 65 in New York, for example, is 50% of the home’s value provided your annual income is less than $29,0009.
Credits and Deductions For Everyone
Medical Expense Deductions
Most medical and dental expenses, including long term care insurance, qualify for a deduction only if the total amount of those expenses is more than 7.5% of your adjusted gross income. You need to itemize your deductions rather than taking the standard deduction for this to apply.
Many older adults leave company roles to work full or part-time for themselves. When running your own business there are a lot of tax deductions to take advantage of like equipment, a home office, and travel. If you spend more than you earn which can happen when starting, you can deduct that loss from your other income sources.
Giving Tax-free to Charity
After 70½, annual withdrawals are required from traditional retirement accounts. If you do not need the money but want to avoid a penalty fee, you can donate money directly to a charity from your IRA, avoiding income tax on that withdrawal. A single person can contribute up to $100,000 tax-free each year, and you can take advantage of this even if you are taking the standard deduction8.