Though your income might decline after you’ve retired, that doesn’t mean the Internal Revenue Service stops collecting taxes in retirement, so it’s important you take any tax breaks for retirees you can. There’s no universal definition of a retiree, so you must check each of the breaks to determine if you qualify. You can take advantage of several tax deductions and tax credits to lower your taxes. Read on for a list of tax deductions for those in retirement.
7 Lesser-Known Tax Breaks for Retirees
To ensure you’re not paying more taxes than you need to, learn about some of the tax breaks that apply to retirees that you might otherwise overlook. Here are tax breaks for the retired:
1. Dental and Medical Expenses
Typically, you’re only allowed to deduct the portion of your dental and medical expenses that exceed 10 percent of your adjusted gross income. However, if you or your spouse are 65 or older, the deduction gets a little sweeter: your threshold drops to 7.5 percent of your AGI. For example, if your AGI is $40,000, you can deduct medical expenses in excess of $3,000.
Medical expenses include a wide range of medical costs, from paying for visits to doctors and dentists, to care at a nursing home and prescription drugs. Similar, you can also deduct costs of false teeth and glasses or contact lenses. Plus, when you have to travel to the doctor, whether it’s driving across town or taking a trip for specialized treatment, you can deduct the costs of travel.
2. Long-Term Capital Gains on Home Sale
You might not need nearly as large a home in retirement as you did previously, so you could be looking at substantial capital gains when you sell your home if you’ve been living in it for a long time. You can exclude the first $250,000 of gain from taxes — or the first $500,000 if you’re married filing jointly — if you meet the qualifications. To qualify, you must have used the home as your primary residence for at least two of the past five years and you must have owned the home for at least two of the last five years.
For example, say you and your spouse bought your home 20 years ago for $200,000. Though it’s been fantastic for raising your kids, they’re all out of school now, and you sell it for $750,000 so that you can downsize. Typically, you would have a $550,000 taxable capital gain. Because you’ve owned the home and used it as your primary residence for at least two of the last five years, you get to exclude $500,000 of gain on your joint return, so you only pay taxes on $50,000 of capital gains.
3. Property Tax Breaks
You’ll still be responsible for paying state taxes if you still own property, whether it’s the same house or you’ve downsized. But many states offer tax reductions for older taxpayers, though the age varies by state.
For example, in New York, if you’re over 65 years old and your income falls below the income limits, your tax assessment on your home can be reduced by 50 percent. In Washington, however, you qualify for a property tax exemption at age 61, though you must still meet income limits.
4. Contributions to Traditional IRAs
You can still make an IRA contribution to a traditional IRA to reduce your taxes if you won’t turn 70.5 years old this year. You must have earned income equal to or greater than your contribution, so if you’re still working part-time or keeping your business going, you can defer the taxes until you take the money out in your traditional IRA at a later date. The deduction for a traditional IRA won’t reduce your Social Security tax, and the Social Security tax rate, like the Medicare tax rate, doesn’t change after you’ve retired.
5. Charitable Contributions From Required Minimum Distributions
When you hit age 70.5, the IRS requires that you start taking required minimum distributions from your retirement savings in qualified plans like IRAs and 401ks. However, you can direct your IRA custodian to distribute up to $100,000 of your retirement distribution directly to charity. The contribution counts toward the minimum amount you have to withdraw but isn’t included in your taxable income.
One advantage to making the charitable contribution directly from your IRA is that the amount is excluded from your taxable income. If you don’t have enough itemized deductions to justify forgoing the standard deduction, you can’t deduct charitable contributions. Second, the amount of the contribution isn’t included in your adjusted gross income, which could mean a smaller portion of your Social Security benefits will be taxable.
6. Credit for the Elderly or Disabled
The Credit for the Elderly or Disabled is available for people age 65 and older or who are totally and permanently disabled who meet the income requirements. The income and nontaxable benefit limits are as follows:
- Singles: $17,500 of income and $5,000 of nontaxable benefits
- Married filing jointly (one spouse eligible): $20,000 of income and $5,000 of nontaxable benefits
- Married filing jointly (both spouses eligible): $25,000 of income and $7,500 of nontaxable benefits
- Married filing separately: $12,500 of income and $3,750 of nontaxable benefits
As long as you qualify, you can allow the IRS to figure the tax credits for you by attaching Schedule R, checking the box in Part I, and completing Part II and lines 11, 13a, and 13b of Part III. To claim the credit, you must use Form 1040 or Form 1040A.
7. Increased Standard Deduction
When all else fails, you can take solace in the fact that your standard deduction goes up just because you’re getting older. If you are 65 or older or are blind, your standard deduction increases by $1,550 if you are single or head of household or $1,250 if you are married.
This article was originally published on GOBankingRates.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
