Using every tax incentive available to you becomes crucial as you approach retirement and reduce your income from employment. By doing this, you can extend the life of your nest egg and help pay for daily costs.
Learn everything you need to know about taxes, credits, and deductions you might be entitled to by using this guide to tax counseling for seniors and the elderly.
Who Qualifies As A Retiree Vs. A Senior?
Even though “retiree” and “senior” are frequently used synonymously, the tax code has particular standards that are used to determine if you qualify for tax benefits:
Retirees: Unless accompanied by a disability, the term “retiree” in the tax code has no legal meaning. In this instance, it denotes retirement and a disability that prevents you from working.
Seniors: People who reach the age of 65 during the tax year are considered seniors. If you fall into this group, you are eligible for any tax savings set aside specifically for older citizens.
You cannot claim the tax deductions offered to seniors if you are under 65 and not disabled. This is frequently the case because you can retire at any age.
What Tax Options Are Available To Seniors?
As a senior, you can claim many tax benefits, whether deductions, credits, or exemptions.
Tax breaks operate like exemptions. In contrast to tax credits, which reduce your tax liability dollar for dollar, both help reduce your taxable income. Tax credits often offer higher value for your money, everything else being equal.
A higher standard deduction as you age is the first automatic tax benefit. The IRS increases your standard deduction by a certain amount once you turn 65.
Single filers 65 and older receive $14,700 in 2022, while single filers 64 and younger normally receive $12,950. This additional $1,750 increases the likelihood that you’ll choose to use the standard deduction rather than the itemized deduction, simplifying the process of preparing your tax return.
This can reduce your yearly tax liability by up to $385 if you are in the 22% tax bracket.
If you are married and just one of you is 65 or older in 2022, you will only receive an additional $1,400 or $2,800 if both of you are.
You could also be eligible to continue making contributions to your individual retirement accounts (IRAs) after retiring, serving as an additional tax deduction, depending on your circumstances.
You must have earned income in the contribution year to qualify.
If your spouse keeps working, they are allowed to make contributions into an account in your name in 2022 of up to $7,000 ($6,000 + $1,000 in catch-up payments). This necessitates that your spouse earns enough money to contribute to your and, if they so choose, their accounts.
Taking the Standard Deduction Vs. Itemizing Deductions
You cannot claim both the standard deduction and itemized deductions at the same time. It’s also a somewhat challenging choice because the Tax Cuts and Jobs Act (TCJA) essentially quadrupled the standard deductions for all filing statuses for 65 or older.
For the tax year 2022, the base standard deductions before the bonus add-on for older adults are as follows:
- $25,900 for married taxpayers who file jointly and qualifying widow(er)s
- $19,400 for heads of household
- $12,950 for taxpayers who file separately, whether single or married
Especially if their mortgages have been paid off and they no longer qualify for the itemized interest deduction, many older taxpayers may discover that their standard deduction plus the additional standard deduction for age equals more than any itemized deductions they can claim.
But suppose you still have a mortgage and consider items like property taxes, medical expenses, charity contributions, and any other deductible expenses you might have. In that case, you could get a bigger deduction for itemizing.
At the end of the tax year, let’s say you were 65 or older (or under 65 but retired due to a permanent, total disability with disability income). You can be eligible for the Tax Credit for the Elderly or Disabled in that situation.
You can use this credit to partially reduce your tax liability, but only if your income is under particular bounds.
The Tax Cuts and Jobs Act eliminated personal exemptions from federal taxes for tax years 2018 through 2025. On the other hand, some states provide tax exemptions on particular forms of retirement income or real estate taxes.
Common Tax Credits and Deductions
Medical Expense Deductions
Long-term care insurance and most medical and dental costs are eligible for a deduction if they total more than 7.5 percent of your adjusted gross income (AGI). For this to be applicable, you must itemize your deductions rather than use the standard deduction. You may write off payments made for the diagnosis, treatment, mitigation, or disease prevention as medical costs.
Many senior citizens quit their jobs at companies to work full- or part-time for themselves. There are numerous tax breaks available to business owners, such as those for travel, office space at home, and equipment. You can deduct that loss from your other sources of income if you spend more than you make, which is possible when you start.
Qualified Charitable Distributions
Annual withdrawals from typical retirement funds are necessary after 72. Qualified charitable distributions (QCDs) are an option if you don’t need the money but want to avoid paying a penalty fee. You can directly donate your IRA to a charity using QCDs while avoiding paying income tax on the withdrawal. A single individual may make tax-free contributions of up to $100,000 yearly, and you may do so even if you use the standard deduction.
Giving back has a lot of advantages. Charitable cash contributions up to $300 ($600 if you’re married filing jointly) can be deducted from your taxes even if you don’t itemize. Charities must be given to recognized institutions, including churches, hospitals, schools, and veteran’s organizations.
The first $750,000 ($375,000 if married filing separately) of house mortgage interest can be deducted. To take advantage of this deduction, your tax return must be itemized.
Sale of Home
During their golden years, many senior citizens choose to downsize or move into retirement homes. The sale’s profit may be eligible to be completely (or partially) excluded from the taxpayer’s taxable income. The maximum exclusion for single or married individuals filing separately is $250,000. $500,000 if married, filing jointly, or widowed.
Being on your own can be overwhelming if you’re trying to save money, look for tax relief, or better understand your taxes. Taxes may present a greater challenge as you age, particularly if you depend on savings in addition to any Social Security payments and are on a fixed income.
To learn more about other senior financial benefits, you may also check our article, Benefits For Older Adults: What Are They? This article will discuss other benefits that could help you with your finances as a senior.